[Senate Hearing 107-1068]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1068



                  ``PROMISES MADE, PROMISES KEPT: ARE
                 INTERNATIONAL TRADE AGREEMENTS REALLY
                        INVESTMENT AGREEMENTS?''

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

                                HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 1, 2001

                               __________

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



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           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, Ranking 
JOHN D. ROCKEFELLER IV, West             Republican
    Virginia                         TED STEVENS, Alaska
JOHN F. KERRY, Massachusetts         CONRAD BURNS, Montana
JOHN B. BREAUX, Louisiana            TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
RON WYDEN, Oregon                    OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 SAM BROWNBACK, Kansas
BARBARA BOXER, California            GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina         PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
BILL NELSON, Florida                 GEORGE ALLEN, Virginia

               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 August 1, 2001...................................     1
Statement of Senator Allen.......................................     7
Statement of Senator Dorgan......................................    24
Statement of Senator Hollings....................................     1
Statement of Senator McCain......................................     3
    Prepared statement...........................................     5
Statement of Senator Nelson......................................    22

                               Witnesses

Evans, Hon. Donald L., Secretary, Department of Commerce.........    10
    Prepared statement...........................................    12
Luttwak, Edward N., Ph.D., Center for Strategic and International 
  Studies........................................................    49
    Prepared statement...........................................    51
Reinsch, William, President, National Foreign Trade Council, on 
  behalf of the National Foreign Trade Council and the 
  Organization for International Investment......................    42
    Prepared statement...........................................    45
Tonelson, Alan, Research Fellow, United States Business and 
  Industry 
  Council Educational Foundation.................................    35
    Prepared statement...........................................    37

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina, 
  prepared 
  statement......................................................    59

 
                  ``PROMISES MADE, PROMISES KEPT: ARE
                     INTERNATIONAL TRADE AGREEMENTS
                    REALLY INVESTMENT AGREEMENTS?''

                              ----------                              


                       WEDNESDAY, AUGUST 1, 2001

                               U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 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 hearing will please come to 
order. Mr. Chairman--I still call him Chairman--it is good that 
you and I are here, because we can always agree. On the last 
hearing we went from side to side and what I was doing was 
recognizing those who had just come in, in disregard of those 
who had been waiting for an hour-and-a-half. So whether they 
are Republican or whether they are Democrat, unless you object, 
we are going to recognize them as they come in.
    Senator McCain. However you would like to, Mr. Chairman, is 
fine with me.
    The Chairman. I think that is a fair way to do it, because 
the question was raised at that time.
    Mr. Chairman, we welcome you today back from your travels 
and getting on to what I consider the most important subject 
really facing the U.S. Congress. For example, we were just 
reading here that--this is in the morning New York Times--since 
1995, the U.S. current account deficit, the difference between 
what we buy from foreigners and what we sell to them, has 
quadrupled to an astonishing $450 billion.
    It goes without saying that this is the biggest such 
deficit in world history. Startlingly, it is a fact that at 4.5 
percent of the GDP, the U.S. current account deficit is a 
bigger share of the economy than the deficits Indonesia and 
South Korea had on the eve of the 1997 Asian fiscal crisis.
    I notice, and I commend you for it, Mr. Secretary, in your 
appearances from time to time you introduce yourself as having 
met a payroll, having executed a business plan. Let me speak in 
a similar fashion.
    I was admitted to practice before the U.S. Customs Court, 
practicing before Judge Paul Rayall of New York back in the 
1950s. I testified before the old U.S. Tariff Commission before 
it was changed into the Trade Commission, when Tom Dewey chased 
me around the hearing room. That was almost 40 years ago.
    Thinking of it, the big issue is the Free Trade with the 
Americas Initiative by the Bush Administration. I do not want 
to sound like Al Gore, but I invented free trade with the 
Americas 40 years ago when I went as a Governor--I was the 
first Governor to go down to Latin America to promote trade. So 
I am a very strong believer in trade.
    The point that I am trying to make is, with this 
experience, we know that Fast Track is not necessary. Only 
yesterday, the House of Representatives approved the trade 
treaty and agreement with Jordan without Fast Track. I remember 
President Clinton during his 8 years entered into some 234 
trade agreements. We in turn approved, without Fast Track, the 
Chemical Weapons Treaty; we approved the sub-Sahara with all 
the nations in Africa; we approved, without Fast Track, the 
Caribbean Initiative. If they bring them over, we will be glad 
to support--and I have said so publicly prior to this hearing--
not only the Jordan agreement, but the one with Vietnam.
    So we can act, and in my 34 years that has been the better 
approach, because I have found that Fast Track really causes 
problems.
    I will never forget the debate we had back in 1993-1994 on 
NAFTA with Fast Track. At that time, we submitted that the 
proper approach--and I will put an article in the record at 
this particular time that we wrote for Foreign Policy--it was 
the Common Market approach that was used in Europe.
    The Europeans found that Fast Track was a mistake, that you 
had to first build the infrastructure of a country before you 
could really get into an effective and fair trade agreement. 
Namely, you had to have free elections. I can hear my former 
colleague, Senator Moynihan: ``How can you have free trade when 
we do not even have free elections. You have got to have free 
elections, you have got to have property ownership rights, you 
have got to have labor rights, a respected judiciary; build in 
the infrastructure for health and, yes, for safety.''
    We had not built that in. I only met yesterday with Dr. 
Derbez, who is the Economic Minister from Mexico. He and I went 
over what is the so-called Murray--it is bipartisan--Murray-
Shelby amendment. I said: ``Mr. Minister, I want you to name 
one thing in these particular requirements that have got to be 
worked out that is not required of the American truck driver? 
If it is not required of ours, out it goes.''
    That was the approach we in the Senate used. In other 
words, over on the House side, they were rather arbitrary; they 
just said, ``We are going to cut off any money.''
    The President announced that he was going to open up the 
border on January 1, and they more or less said, ``the heck you 
are, and we are going to cut off any money to do that.'' Well, 
that is not any way to implement NAFTA. In order to do it we 
said, ``here, the border can be opened up until, until, 
until,'' and we outlined these things that are required for 
safety of our own truck drivers.
    We have got a lot of work to do also. In other words, there 
are only 2 of the 27 stations that are ready to receive trucks 
and we do not want the backups. We have got to put in the weigh 
stations, all those kind of things. One is, for example, we 
inspect, like the Mexicans. They inspect our apples up in 
Seattle right now, we inspect and find out that they have got 
the right safety requirements down there. Then when they 
present the sheet of paper at the border we know it is 
credible, and it facilitates.
    So you have to build up the infrastructure. We found out it 
not only caused the problems, but it was absolutely a failure 
in the sense that NAFTA--I have heard the witnesses come before 
this Committee time and again, but they told us that we were 
going to promote trade. We went from a $5-billion-plus balance 
of trade in the United States with Mexico to a minus-$25-
billion. We were supposed to get 200,000 jobs; we lost 500,000 
jobs.
    The worker in Mexico, he has got more jobs, but he is 
taking home less pay, 8 percent less pay. Just this last week, 
I quote Presidente Fox: ``It is not possible to solve the 
migration problem,'' Fox said, ``if we do not solve the gap 
where a worker in Mexico earns $5 a day and a worker in the 
United States makes $60 a day.'' That brings into sharp focus 
how the matter of trade is really a reconciliation of standards 
of living. What we must do is remember that Fast Track and 
NAFTA did not work with respect to the immigration problem. I 
hear what Constantine, head of the DEA, said just before he 
left, it was worse than the drug problem.
    The biggest opponent of Fast Track in the NAFTA agreement 
was none other than Jorge Castaneda, the foreign minister; and 
Aguilar, who is now the security minister. They were the ones 
who testified before this Committee by satellite until Escara 
down there cut them off.
    As we understand your background and leadership in 
business, you should understand our background in working on 
this particular problem. As you say, you must be accountable to 
the shareholders. I am accountable to the voters, and Article 
1, Section 8, of the Constitution says that the Congress shall 
regulate foreign commerce. We would not ask the President to 
give us authority to approve or veto, and he should not be 
asking us to really regulate the free trade and regulate 
commerce itself.
    I was the biggest opponent, in a way, of NAFTA. But I am 
the biggest proponent today to see that it works, I can tell 
you that, because they are our neighbor. If I had my way, I 
would start, as I discussed with you, a Marshall Plan down 
there to immediately try to build that infrastructure. That is 
what Castaneda, Aguilar, Presidente Fox and all of them believe 
in, and I am convinced of it now, having met with the economic 
minister yesterday afternoon.
    Let me yield to Senator McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Mr. Chairman. I would like to 
commend you for continuing the dialog on this important issue. 
While the Members of this Committee may not always agree on 
trade related issues, I believe we all benefit from this 
discussion.
    As we move toward a global economy, with countries 
increasingly interlinked, trade agreements have ascended to 
center stage and the United States cannot afford to wait in the 
wings. I realize that critics of trade agreements and U.S. 
investment abroad fear the exportation of American jobs and the 
abuse of nations with cheap labor and low environmental 
standards. Skeptics will always find examples to support their 
arguments.
    The reality, however, is that trade agreements enable 
domestic expansion, reduce foreign barriers to U.S. products 
and industries, and ensure that the United States remains 
competitive in the international marketplace. U.S. foreign 
direct investment abroad flows to developing economies rather 
than underdeveloped. Economic expansion, maintenance of global 
stability, enhanced security, and improved multilateral 
relationships are merely a few of the numerous benefits of 
foreign trade.
    Whether we like it or not, we live in a global economy, and 
today U.S. businesses, workers, and consumers rely on the 
global economy for job markets in which to sell goods and 
services and affordable products to consume. Today 1 in every 3 
acres of U.S. farmland is planted for export and more than 12 
million U.S. jobs now depend on trade.
    NAFTA provides an excellent example of the benefits of 
trade. Together, the Uruguay Round trade agreement and NAFTA 
increased U.S. national income by $40 to $60 billion a year.
    We are all aware of many of the statistics, but since the 
signing of NAFTA, trade between the United States and Mexico 
has tripled. As of 1999, the U.S. Chamber of Commerce estimates 
that NAFTA was responsible for the creation of more than 
685,000 new export-related jobs in the United States.
    Mexico also experienced substantial economic benefits from 
NAFTA. Anyone who travels to northern Mexico can see the 
dramatic economic improvement in the conditions there in 
northern Mexico, and any Mexican businessperson or expert will 
tell you that it is a direct result of the economic benefits 
associated with NAFTA.
    Since implementation, Mexico's GDP has increased at an 
average of 3.7 percent a year. Foreign direct investment has 
improved the lives of Mexican workers, who now earn 48 percent 
more than the average national wage from their work in foreign-
owned subsidiaries.
    The expansion of free trade promotes democratic values such 
as transparency, rule of law, protection of private property, 
and freedom of the press. NAFTA, for example, I strongly 
believe can be credited in part for Mexico's successful 
transition to democracy after 70 years of one-party rule.
    I would like to applaud Secretary Evans for his efforts to 
expand trade and economic cooperation abroad, particularly in 
his efforts to promote trade negotiating authority.
    Although part of a new administration, Secretary Evans is 
well versed in the issues surrounding the trade debate and I 
look forward to hearing his perspective.
    This is not a new debate. It goes back to the founding of 
this Nation and will undoubtedly continue. Senator Hollings and 
I have had many debates on this issue and we will continue to 
have many spirited discussions on this issue, albeit somewhat 
repetitious. I believe that as a country we must be globally 
engaged and commit ourselves to the expansion of free trade.
    Now, Mr. Chairman, just for a second, since you brought it 
up, the issue of Mexican trucks. You and I do have a lot in 
common, including the fact that we both ran for President and 
we both failed. So neither one of us are President. The 
President of Mexico and the President of the United States have 
judged the language in the supplemental appropriations bill--an 
appropriations bill, I might add, when rightfully, this issue 
should have been addressed in this Committee--is in violation 
of the North American Free Trade Agreement.
    Our opinions are important, but the people of Mexico and 
the people of this country have delegated the responsibility 
for this judgment to the President of the United States. The 
President of the United States' judgment is unequivocal. It is 
unequivocal that the language in that bill is discriminatory to 
Mexico. I can only speak for myself. I do not believe that 
anyone in the Congress is anti-Mexican or anti-anything.
    But the effect of the language in the supplemental 
appropriations bill is discriminatory against Mexican business 
by not allowing them to do business in the United States, as we 
agreed to by a solemn treaty. That is why the President of the 
United States has threatened to veto this supplemental 
appropriations bill for transportation, which would harm, 
obviously, many important transportation projects throughout 
the country.
    We have offered to negotiate. There are only four remaining 
issues that exist on this issue. Unfortunately, the authors and 
sponsors of the legislation have refused to negotiate. I have 
negotiated on a lot of issues around here, and come to 
agreement on some very serious ones, and I continue to be 
disappointed that there has been no movement in negotiation on 
this issue.
    But the fact remains, the bill will be vetoed by the 
President of the United States, and that is not good for 
America nor good for Mexico, nor is it good for the perception 
that the Mexican government and people have about the United 
States and its willingness to conform with solemn treaties 
entered into between our two countries.
    I thank you, Mr. Chairman.
    [The prepared statement of Senator McCain follows:]

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

    Thank you, Mr. Chairman. Once again, I would like to commend you 
for continuing the dialog on this important topic. While the Members of 
this Committee may not always agree on trade-related issues, I believe 
we all benefit from this discussion. Thank you for your perseverence on 
this matter.
    As we move toward a global economy, with countries increasingly 
interlinked, trade agreements have ascended to center stage, and the 
United States cannot afford to wait in the wings. I realize that 
critics of trade agreements and U.S. investment abroad fear the 
exportation of American jobs, and the abuse of nations with cheap labor 
and low environmental standards.
    Sceptics will always find examples to support their arguments.
    The reality, however is that trade agreements enable domestic 
expansion, reduce foreign barriers to U.S. products and industries, and 
ensure that the United States remains competitive in the international 
marketplace. U.S. foreign direct investment abroad flows to developed 
economies, rather than underdeveloped. Economic expansion, maintenance 
of global stability, enhanced security, and improved multilateral 
relationships are merely a few of the numerous benefits of foreign 
trade.
    Whether we like it or not, we live in a global economy--and today, 
U.S. businesses, workers, and consumers rely on the global economy for 
jobs, markets in which to sell goods and services, and affordable 
products to consume. Today one in every three acres of U.S. farmland is 
planted for export, and more than 12 million U.S. jobs now depend on 
trade.
    NAFTA provides an excellent example of the benefits of trade. 
Together, the Uruguay Round trade agreement and NAFTA increased U.S. 
national income by $40 to $60 billion a year.
    From the time of NAFTA's implementation until very recently, the 
United States experienced the longest peacetime economic expansion in 
history. Unemployment fell from 7 percent to 4 percent. The U.S. gross 
domestic product grew by more than $2 trillion. And real family income 
in the U.S. rose by an average of $2,500. Since the signing of NAFTA, 
trade between the United States and Mexico has tripled. As of 1999, the 
U.S. Chamber of Commerce estimates that NAFTA was responsible for the 
creation of more than 685,000 new export-related jobs in the United 
States.
    Mexico also experienced substantial economic benefits from NAFTA. 
Since implementation, Mexico's GDP has increased at an average rate of 
3.7 percent a year. Foreign direct investment has improved the lives of 
Mexican workers who now earn 48 percent more than the average national 
wage from their work in foreign-owned subsidiaries. NAFTA sparked a 
Mexican export boom, credited with the creation of 3.5 million jobs 
since August 1995.
    The expansion of free trade also promotes democratic values such as 
transparency, rule of law, protection of private property, and freedom 
of the press. NAFTA, for example, I strongly believe, can be credited 
in part for Mexico's successful transition to democracy after 70 years 
of one-party rule.
    I would like to applaud Secretary Evans for his efforts to expand 
trade and economic cooperation abroad, particularly in his efforts to 
promote trade negotiating authority. Although part of a new 
administration, Secretary Evans is well versed in the issues 
surrounding the trade debate, and I look forward to hearing his 
perspective.
    This is not a new debate. In fact, it goes back to the founding of 
this Nation, and will undoubtedly continue. Time and time again we as a 
Nation are faced with the choice of engaging in global affairs, or 
retreating within our own borders. I believe that as a country we must 
be globally engaged, and commit ourselves to the expansion of free 
trade.
    I hope that as a result of this hearing, we will all come away with 
a better understanding of the greater issues involved.

    The Chairman. Mr. Secretary, just a minute. Lots of times 
up here in the Congress, the cart gets before the horse. We had 
set hearings on Mexican trucking, but when the President 
announced that the border was, ipso facto, going to be opened 
without regard on January 1, that put the House into action. 
The appropriations bill that the distinguished gentleman refers 
to came over from the House side already with the bar, so we 
had to deal with it in the appropriations bill. The gentleman 
knows that.
    What we did then is we worked as an authorizing committee 
with the Appropriations Committee and, totally bipartisan, 
unanimously reported out of the Appropriations Committee. So 
this is not an arbitrary thing.
    Otherwise, I can tell you right here and now that I have 
read the arbitration thing. I did not know we were going to be 
debating that this morning, but the arbitration panel referred 
to safety. Presidente Fox's representative was in my office 
yesterday afternoon. He agreed to it, we both have to adhere to 
safety requirements. When I asked him, I said, ``now you have 
got your team here''--he had three other people with him. I 
said: ``You just name it, or when you leave, just work it out 
and find anything in there that is not required of our own 
truck drivers. I want to know about it and I want to make a 
motion to knock it out myself.''
    So that is where we are.
    Senator Allen.
    Senator McCain. Mr. Chairman, why do we not mark up a bill? 
Why do we not mark up a bill through this Committee next week? 
I will be more than happy to join with you and pass a bill 
through the authorizing committee, which is the appropriate way 
to legislate in this Congress.
    The Chairman. Because we are going to pass a bill this week 
before we leave.
    Senator Allen.
    Senator McCain. You ain't going to get it passed.
    Senator Allen. Senator McCain, you can use some of my time.

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

    Senator Allen. All of this is very important and let me 
just say, I am not going to get into the debate, although I 
will say that I generally agree with the views expressed by 
Senator McCain on this matter.
    Now, on the matter of trade----
    The Chairman. Your time is up.
    [Laughter.]
    The Chairman. Goodbye.
    Senator Allen. I voted with you on a few of those 
amendments.
    The Chairman. Excuse me, Senator Allen. I thank the 
Governor. He is a former Governor. We get along together.
    Senator Allen. Mr. Chairman, let me start this way, then.
    Congratulations on this wonderful hearing that you are 
having here today and the series of hearings that you have been 
having over the last month on the issue of international trade. 
I think it is very important that we all discuss our 
perspectives and also learn and determine what we need to do.
    I am very happy, of course, to see Secretary Evans here and 
look forward to his remarks, and I am sure he will digest the 
comments from this Committee in moving forward.
    I believe, Mr. Chairman and Ranking Member Senator McCain, 
that international trade can improve lives. I think it can 
create more job opportunities here. I also think it can secure 
peace, because when there is more economic ties and commerce 
then there is less of a chance of disruption, and people 
generally in business, they do not like disruptions. So even 
indirectly, I think it is helpful for peace.
    I am a strong supporter of giving the President the trade 
authority that he needs to expand our markets abroad. I think 
it means more opportunities for our businesses and enterprises, 
and I also believe it means good-paying jobs for our workers. I 
think trade promotion authority clearly is going to open up 
markets that have barriers to our services, our products, and 
our goods. I think it will ensure growth, especially in our 
high tech economic sector. I think it will help get other 
countries to the negotiating table, realizing that the 
President has the authority to negotiate a contract and not 
have somebody else change it too much.
    I think it makes us a leader in world trade, which I think 
is important, because I think Americans can compete with anyone 
in the world. Now, there are some areas where it may be more 
difficult.
    But just from my perspective as Governor of Virginia, Mr. 
Chairman, I know that we were looking at what the impact of 
trade is. Virginia sold more than $10.5 billion worth of 
exports to nearly 200 foreign markets last year. The number of 
Virginia companies exporting increased 62 percent from 1992 to 
1998. More than 79 percent of Virginia's approximately 4,700 
companies that export are small and medium-sized businesses. 
There are an estimated 142,000 Virginia jobs that depend on 
manufactured exports and 1 out of every 7 manufacturing jobs in 
our Commonwealth of Virginia, which ends up being about 59,000, 
are tied to exports.
    Now, Virginia benefits from exporting anyway even if the 
origination is not Virginia or the destination Virginia, in 
that commerce may be going through our ports. It may be 
something coming from Kentucky or West Virginia or Ohio or even 
parts from--I know very well that parts from Michigan for 
Voyagers going to Austria, we were able to get them to bring it 
through our ports in Virginia rather than having them go 
through the ports in New York and New Jersey.
    We also found, while I was Governor, in analyzing this that 
the jobs, the pay is higher on workers who are involved in 
exporting by about 13 to 18 percent higher than the national 
average. We have about 6,000 citizens in our Commonwealth who 
hold jobs that are related to agricultural exports. Virginia 
reported an estimated $386 million in agricultural products 
exported in 1999.
    Our exports, in particular as far as Canada and Mexico go, 
increased. 1999 was 90 percent higher than in 1993, prior to 
NAFTA.
    Now, I am hopeful, Mr. Chairman, that in the midst of all 
these Mexican truck and transportation matters that somehow 
this week we will be able to modernize the Export 
Administration Act. That Act is outdated, it is outmoded. It 
expires on August 20, and it seems to me that it is not doing 
much at all, if anything, to protect our security, but the 
outmoded, outdated Export Administration Act is mainly harming 
our ability, especially technology companies, to be competitive 
in selling overseas, and those products or technologies are 
being sold by people from France or Germany or Japan or Korea 
or elsewhere.
    Now, as Governor--you were talking about being Governor and 
leading trade missions, and that is one of the best parts of 
being a Governor, I think. You are in a position, you are the 
CEO of the State. You are able to sit there and give 
credibility to whichever businesses, large, small, or medium 
that come with you, and you also can strike a deal. You can 
close that deal with the CEO of a company.
    My first year in office was 1994, and we went up to Canada 
and to Mexico. We wanted to take advantage of these open 
markets or opening markets. It was very helpful. When we first 
went up to Quebec, a small company called Radva that makes 
housing construction equipment, they secured a deal the first 
day and they did not care to go on to Toronto or anywhere else. 
They got what they wanted, a $5 million contract.
    We went down to Mexico as well, and from that, we were able 
to help sell to the Mexico City police Ericsson secure radios 
or telephones for their security, their critical radio systems, 
and those were made in Lynchburg, Virginia. We got a $10 
million contract for a bearings company in Virginia when Mexico 
was trying to upgrade their rail system.
    So it was very, very successful and there were others from 
it. But the point is that, over the years, we went on trade 
missions everywhere. We were all over, obviously to Britain and 
France and Germany several times, also to opening markets in 
Poland, Hungary, the Czech Republic, Sweden, Denmark, Austria, 
Korea several times, Japan several times, Egypt, Israel, Hong 
Kong, Taiwan, and elsewhere.
    All of these really did pay off, and it was great for 
promoting our goods and products and services. In some of the 
more developed countries, it was mostly valuable in recruiting 
new investment and new jobs into Virginia. Just from Sweden, we 
had Volvo Trucks and Ericsson.
    From Great Britain--I was just writing down notes as you 
were talking. From Great Britain, Drake Extrusion, Allied 
Colloids; France, we were able to get Jouan Medical Equipment; 
PGF, which is Porshay Industries; Framatome was already a 
French company in Virginia. Denmark, we were able to get Mersk 
Marine to move to Virginia. The Netherlands, Blueprint 
Automation; Germany, Siemens Steel, chain saws; Infineon, 
Klockner, Von Holtzpring Publishing, Muelbauer, to name a few; 
Maple Leaf Bakeries from Canada.
    From Japan, we got Toshiba to build a several billion 
dollar semiconductor fabrication plant in Manassas; Tama 
Chemical, Wacco Chemical, Sumitomo, Torre, Yokahama Tires, 
Canon, Tokyo Electron, Upo Paper, Mitsubishi Chemical; 
Australia, RGC, industrial galvanizers; and others from Korea 
and Austria and other countries.
    So I could go on and on, but the point is Virginia is 
benefiting mightily from international trade, whether it is our 
products going out and services or goods, but it is also 
benefiting from the fact that these countries, especially those 
who have a history of freedom and the rule of law and private 
property rights, have the capital to invest and come into our 
country.
    I know South Carolina is a fierce competitor, and South 
Carolina, with your leadership that you started there and 
carried on by Carol Campbell and others, has done a great job 
in recruiting Japanese companies and German companies and 
others from all around the world, and that benefits the people 
of our respective States.
    Now, I do want to say this. Trade and international 
competition, when you are looking at a bottom line in a 
business sense, is a net plus, but there are also negatives.
    International competition can cost jobs. That is recognized 
in NAFTA. Mr. Chairman, I mentioned this at an earlier hearing 
and I am going to mention it again, that the Transitional 
Assistance Act which was put into place to help people 
transition when they are unemployed because of international 
competition, is a good idea for retraining.
    I saw in South Side Virginia, the Martinsville, Henry 
County area, a lot of people, thousands of people who lost 
jobs, textile business. Toltex was the particular company.
    It was, to me, like a natural disaster, like a flood hit, 
but it was an economic disaster.
    I think that as we go forward with any trade legislation, 
Mr. Secretary, that there ought to be an understanding that a 
lot of these folks, all of them, are good, hard-working, loyal 
employees and through no fault of themselves they have lost the 
money. So I would like to see something. Give them home 
preservation loans, give them a bridge loan, so that they do 
not lose those jobs. I think that ought to be a part of it.
    Both the leading folks say that we want to hear from you, 
so with that I look forward to hearing your remarks. You have 
an ally in me and I hope to work with you in the future.
    Thank you, Mr. Chairman.
    The Chairman. Very good. Thank you, Senator.
    Secretary Evans, we would be delighted to hear from you, 
sir.

              STATEMENT OF HON. DONALD L. EVANS, 
               SECRETARY, DEPARTMENT OF COMMERCE

    Secretary Evans. Mr. Chairman, delighted to be here.
    Mr. Chairman, nice to see you. Senator Allen, thank you 
very much.
    Mr. Chairman, I am not sure we agree on TPA. I am going to 
do my best to persuade you that TPA is something that is very 
important for this President and this country to lead America, 
lead the world in trade. But it is always a pleasure to be here 
and if I might, I would like to have my written testimony----
    The Chairman. Your statement in its entirety will be 
included in the record and you can summarize it or deliver it 
in full.
    Secretary Evans. Thank you very much. I would like to do 
that. Thank you, Mr. Chairman.
    President Bush and I agree that trade is the key to 
increasing prosperity and extending freedom, equality, and 
security around the world. It is a moral imperative. That said, 
I never lose sight of the fact that trade is, above everything, 
a bread-and-butter issue for all Americans. With 98 percent of 
global gross domestic product and 95 percent of humanity 
outside of our borders, it is clearly in our interest to open 
foreign markets to American exports.
    As you have pointed out previously, Mr. Chairman, both 
trade agreements and trade barriers are about investment. I 
understand your concern and the concern of other Members of the 
Committee and Congress that trade agreements might become a 
vehicle for encouraging investment abroad. I will come back to 
that point in a moment.
    I also want to make sure we take into account the opposite 
perspective, that removing foreign barriers to trade can also 
eliminate the incentive to invest abroad to avoid high tariffs. 
The net result is that our firms can maintain investments and 
production here, because they can gain access to foreign 
markets by exporting.
    The vast majority, nearly three-quarters, of total U.S. 
direct investment abroad is in other developed countries that 
have high labor and environmental standards and enforcement.
    What that underscores this is that American capital flows 
to where there is a positive and secure investment environment, 
one that provides the rule of law and acceptable rate of 
return, rather than one driven by lower labor standards and lax 
environmental enforcement.
    U.S. business tends to take its labor and environmental 
standards abroad when investing, thus raising the bar in 
countries where domestic standards are lower.
    In addition, our exports often follow U.S. direct 
investments abroad. Studies have shown that for every $1 in 
overseas investment, an additional $2 in exports to that market 
tend to be generated. In this regard, we have to get back in 
the international trade game and break down barriers to U.S. 
exports and improve job opportunities for American workers.
    To do that, Congress and the President need to reach 
agreement on the scope and goals of trade negotiations. The 
vehicle to make that happen is Trade Promotion Authority, and 
the sooner the better. As President Bush has observed, free 
trade agreements are being negotiated all over the world and we 
are not a party to them. There are over 130 preferential trade 
agreements in the world today. The United States belongs to 
only two. Our competitors are busy signing deals while our 
negotiators sit on the sidelines, and these deals are placing 
us at a competitive disadvantage.
    Both strengthening the President's hand in negotiations and 
reinforcing the constitutional role of Congress are essential 
to a successful American trade policy, one that serves the 
interests of all Americans.
    I understand, as you do, if we do not enforce our current 
agreements we cannot expect support for further negotiations.
    I have made compliance and enforcement the highest priority 
for all units in international trade administration.
    Mr. Chairman, I want to thank you for your support for the 
compliance initiative and assure you that we have been moving 
ahead. In terms of compliance, our emphasis is on problem-
solving and results. I am also committed to aggressively 
investigating allegations of subsidies and dumping under our 
trade laws. American workers and farmers can truly be 
dispirited by the belief that they are not competing on a level 
playing field.
    We are also acutely aware of the fact that for our economy 
to fully benefit from new market openings, we need to expand 
the base of exporters, and that means including every sector of 
our economy, especially our small businesses. This requires the 
coordinated effort of all Federal agencies involved in export 
promotion and trade development.
    Fortunately, we have the right management tool in place, 
the Trade Promotion Coordinating Committee, which comprises 19 
agencies. The Coordinating Committee works on behalf of small 
businesses by coordinating government export promotion programs 
so that small companies can access them more easily.
    Mr. Chairman, we need to engage in a dialog that will help 
us move forward as a Nation, with the full support of Congress, 
for our efforts to open new markets for American goods, 
services, and ideas. Americans have always been at the 
forefront of change and progress and we have always prospered 
as a result. That is what has made us such a forward-looking 
Nation. I believe we can continue to lead in a world that is 
more active than ever in trade and commerce, and I truly 
believe that we should do this in a way that provides 
opportunities to all American workers, business owners, and 
families.
    Thank you for your time and I will be happy to answer any 
questions that you might have.
    [The prepared statement of Secretary Evans follows:]

        Prepared Statement of Hon. Donald L. Evans, Secretary, 
                         Department of Commerce

    Thank you, Mr. Chairman, Senator McCain, and Members of the 
Committee, for inviting me to testify before the Senate Commerce 
Committee on how to ensure that Americans receive the benefits from the 
trade agreements we negotiate.
    Mr. Chairman, I would like to discuss our ideas about establishing 
a new American trade agenda to serve the interests of all Americans. I 
will address the need to expand our exports--to benefit our businesses, 
our farmers, our workers; the need to monitor compliance; and the need 
to support export promotion activities to ``fill in'' behind our 
negotiations. I am interested in the Committee's view on an agenda to 
serve that purpose. That is, I am here today as much to listen as to 
testify.

           EXPANDING ECONOMIC OPPORTUNITIES FOR ALL AMERICANS

    President Bush and I agree that trade means considerably more than 
just economic growth, more higher-paying jobs, and a rising standard of 
living in America. Trade is ultimately about freedom. It is the freedom 
for America's farmers, entrepreneurs, and workers to pursue their own 
economic destiny. And, as the President has said, trade also encourages 
those habits of liberty that form the foundation of democratic self-
government. Trade and open markets allow men and women around the world 
to pursue their own destiny, rather than depending on the hand of 
government to determine their future. That's why President Bush calls 
free trade a moral imperative. Mr. Chairman, freedom is our most 
important export.

Importance of Expanding Exports to the U.S. Economy
    That said, Mr. Chairman, I never lose sight of the fact that trade 
is, above all, a bread and butter, kitchen table issue for all 
Americans. Beyond the moral arguments and beyond statistics, trade has 
real meaning for and a real impact on real people. What that boils down 
to is whether our trade policies are expanding economic opportunities 
for U.S. farmers, workers, and firms here at home and abroad. That, in 
turn, depends on opening new markets for U.S. exports.
    The United States, I am pleased to say, remains the world's largest 
exporter, with U.S. exports representing a 12.7 percentage point share 
of total world exports of manufactured goods. U.S. exports accounted 
for nearly one-quarter of our economic growth during the past decade. 
More than 20 percent of the goods produced in the United States are 
exported, and more than 200,000 U.S. firms rely on exports for some 
portion of their business. With 78 percent of global gross domestic 
product and 95 percent of humanity outside our borders, we must 
continue to open foreign markets to American exports.
    Last year, U.S. exports of goods and services were equivalent to 11 
percent of gross domestic product. U.S. export trade has expanded even 
faster than the overall U.S. economy. U.S. exports increased from $57 
billion in 1970 to $1,069 billion in 2000, an increase of over 10 
percent per year. We estimate that some 12 million U.S. jobs are now 
supported by exports, and these jobs pay up to 18 percent more than the 
national average.
    Equally important, exports make up a growing share of the markets 
served by American small and medium-sized businesses. Those businesses 
create three out of four jobs in America, account for one-half of the 
annual U.S. gross domestic product, and represent 97 percent of all 
U.S. exporters. To stay at the forefront of innovation, U.S. small and 
medium-sized businesses need access to foreign markets and a level 
playing field globally.
    The growth in trade as a factor in the U.S. economy mirrors the 
importance of trade globally. Trade as a percentage of the world 
economy has grown 16-fold since the creation of the General Agreement 
on Tariffs and Trade in 1947. Estimates of the increase in global 
growth that would result from a new round of World Trade Organization 
negotiations run as high as $600 billion. Both the growth in world 
trade and the process of writing the rules that will govern trade 
relations will go on, with or without us.
    Given the competitiveness of the U.S. economy, the growth in world 
trade and the potential reduction of barriers to U.S. exports could 
open a new market for U.S. exports. But, to realize that potential, the 
President has to be able to take a seat at the negotiating table. It is 
not in our national interest to let the rest of the world set the rules 
of the road that will govern our trade. When the rules of the road are 
set by others, they will create, rather than remove, barriers to our 
exports and put American exports at a competitive disadvantage. And, in 
the end, that means less investment, slower economic growth and fewer 
job opportunities.

Relationship of Trade and Investment
    As you have pointed out previously, Mr. Chairman, both trade 
agreements and trade barriers are about investment. I understand your 
concern and the concerns of other members of the Committee and the 
Congress that trade agreements might become a vehicle for encouraging 
investment abroad solely as a means for lowering a company's costs and 
then exporting back to the United States.
    First, let me say that trade and investment are not either/or 
propositions. Our experience throughout the post-war period is that 
trade and investment grow together. Europe and the United States have 
invested heavily in each other, yet trade has also grown rapidly. That 
said, we as a Nation have been concerned about trade barriers and 
investment rules that are intended to force U.S. firms to invest abroad 
rather than export and/or to have to export a large part of the output 
of their foreign investments back to the United States.
    For example, when U.S. automobile exports face high tariffs of 35 
percent in Brazil (as opposed to the 2.5 percent tariffs Brazilian 
autos face here), it creates an artificial incentive to invest in 
Brazil behind that high tariff wall. That means that Brazil gets both 
investment and jobs that would otherwise go to the United States. 
Eliminating those tariff barriers would allow American companies to 
enter the Brazilian market by exporting, and the investment and jobs 
would stay home in the United States.
    In other cases, countries impose investment requirements or provide 
investment incentives that encourage U.S. firms to invest abroad as a 
condition of access to their markets. Those requirements or incentives 
are often coupled with the obligation to export a significant share of 
the new facilities output. The net effect of these ``trade-related 
investment measures'' is to shift investment abroad and reduce job 
opportunities in the United States.
    Elimination of those requirements or incentives, together with 
tariff reductions, allows U.S. firms to export, thereby keeping 
investment and jobs here at home. For example, when Chrysler was 
deciding where to build the Durango, now one of the hottest selling 
vehicles in the North American market, it was able to base its plant in 
Delaware, rather than having to build in either Mexico or Canada to 
gain access to those markets. This is a good example of how trade 
liberalization under the North American Free Trade Agreement (NAFTA) 
has affected both trade and investment.
    The numbers on investment tend to bear out what one would expect 
from the elimination of trade barriers abroad. Over the last 5 to 10 
years, while the tariff cuts under the NAFTA and the Uruguay Round took 
hold, the United States has continued to see a strong inflow of foreign 
investment generally. In fact, the United States has steadily run a 
capital account surplus since 1975. Statistics on foreign direct 
investment (FDI) reinforce the same basic message: the United States 
remains both the largest exporter and the largest recipient of FDI.
    In other words, since the implementation of the NAFTA and the 
Uruguay Round and the elimination of significant barriers to U.S. 
exports, we have seen more foreign direct investment in the United 
States than we have seen U.S. direct investment abroad. What that means 
in practical terms is that eliminating barriers to U.S. exports can 
have a real impact on the level of investment and the number of jobs 
created here in the United States. While eliminating those trade 
barriers is not the only thing that makes the United States an 
attractive place to invest, it certainly has been a strong contributing 
factor.

Need for Trade Promotion Authority
    Mr. Chairman, we have got to get back into the international trade 
game if we are to break down barriers to U.S. exports and improve job 
opportunities for American workers. President Bush has observed that, 
``Free trade agreements are being negotiated all over the world, and 
we're not party to them.'' There are over 130 preferential trade 
agreements in the world today. The United States belongs to only two.
    Our competitors are busy inking deals while our negotiators sit on 
the sidelines, and these deals are placing us at a competitive 
disadvantage. For instance, a U.S. company exporting a tractor to Chile 
must pay a $25,000 tariff. If that U.S. company moved its factory to 
Brazil and exported a tractor to Chile, it would pay a $15,000 tariff. 
But, a Canadian company exporting a tractor to Chile pays no tariff at 
all because Canada has a free trade agreement with Chile. What that 
means is that the Canadian company is going to get the sale, and the 
investment and jobs that go along with producing that tractor.
    The President has made clear that he intends to press forward 
wherever we can to expand trade and economic opportunities for all 
Americans. We want to be prepared to take action where the 
opportunities arise and to ensure that our exporters gain their fair 
share of the new export markets those agreements may create. To do 
that, however, the Congress and the President need to reach agreement 
on the scope and goals for our trade negotiations. And, the vehicle for 
reaching that agreement is Trade Promotion Authority (TPA).
    It has been argued recently that TPA is not necessary now, that it 
is only needed at the end of a negotiation to implement the deal. My 
own view is that TPA is just as important at the beginning of a 
negotiation as it is at the end. That is because TPA represents 
something of a contract between the Congress and the President on the 
scope of negotiations and the goals we should pursue at the negotiating 
table.
    With TPA in hand, the President can face our trading partners with 
the full backing of Congress. And, our trading partners cannot mistake 
the importance of Congress' role in setting the agenda for such talks, 
as well as its role in approving and implementing any eventual bargain. 
In my view, that both strengthens the President's hand and reinforces 
the constitutional role of the Congress in the trade policy process.
    Both strengthening the President's hand in negotiations and 
reinforcing the constitutional role of the Congress are essential to a 
successful American trade policy--one that serves the interest of all 
Americans. Given what is at stake in terms of economic opportunity, the 
time to renew the contract between the Congress and the President is 
now. The United States has historically played a leadership role in 
international trade, constantly pushing for more freedom, more 
opportunity, and more fairness in the global marketplace. It is time 
America got back in the game.

                   COMPLIANCE AND ENFORCEMENT ARE KEY

    Mr. Chairman. I understand--as do you--that a second element is 
needed to ensure that American farmers, workers and firms benefit from 
an aggressive American trade agenda. The process here in the United 
States cannot end with the negotiation of an agreement and its 
implementation by the Congress. If we do not aggressively enforce our 
current agreements, we cannot expect Americans to support further trade 
negotiations. That is, promises made must be promises kept.
    In the end, it is about trust. The ability of the Congress to trust 
that the President will make use of Trade Promotion Authority in a way 
that works for all Americans and the ability of the American people to 
trust both the Congress and the President to defend their interests. 
That trust ultimately depends on our ability to ensure that the United 
States gets what we bargained for under existing and future trade 
agreements.
    I believe in keeping a bargain when I make one. Since my 
confirmation hearing before this Committee in January, I have made 
compliance a top priority at the Commerce Department. Mr. Chairman, I 
know the important role you played in focusing the Department's 
compliance efforts in the past, and I want to provide you with the 
strongest possible assurance that we will follow through.

Making Compliance and Enforcement a Priority
    I have made compliance and enforcement the highest priority for all 
the units within the International Trade Administration, so that our 
commercial officers at home and overseas, as well as our industry 
analysts and desk officers in Washington, work together to enforce our 
trade agreement rights. Our emphasis is on problem-solving, and we have 
cast a wide ``net'' in that effort. Rather than simply waiting for 
problems to come to us, the Department conducts extensive public 
outreach programs to ensure that American business understands the 
benefits of trade agreements that they are due and the resources 
available through the Commerce Department and other governmental 
agencies to enforce them. We have a Compliance Liaison Program with 
trade associations and local business export councils to facilitate 
communication and prompt action on compliance issues. We also conduct 
routine surveys of our private sector Compliance Liaisons to learn 
about trade barriers and compliance problems their industries are 
facing.
    While much of the attention focuses on ITA and its Market Access 
and Compliance (MAC) unit, I have made clear that trade agreements 
compliance is everyone's job, not only in ITA or MAC, but throughout 
the Department. ITA coordinates a bi-weekly Compliance Coordinators 
meeting, including representatives from all relevant Commerce 
Department agencies, to promote the sharing of their expertise on 
compliance issues facing the Department and American exporters. Thus, 
the National Institute of Standards and Technology, for example, may 
help ITA analyze whether a country is abiding by the WTO Agreement on 
Technical Barriers to Trade when it proposes a new standard or a 
testing and certification requirement that affects U.S. exporters. 
Similarly, the Patent and Trademark Office assists ITA in determining 
whether the actions of certain countries are consistent with the WTO 
Agreement on Trade-Related Aspects of Intellectual Property Rights. ITA 
and the National Telecommunications and Information Administration 
(NTIA) work together to promote pro-competitive regulatory environments 
in foreign telecommunications markets, including monitoring and 
enforcement of commitments made in the WTO Agreement on Basic 
Telecommunications Services. ITA relies on NTIA for its expertise on 
the telecommunications policy in the United States so that these 
principles can be effectively advocated with foreign governments.
    The most important point is that it works. Let me offer a few 
recent examples.
     In May, we helped a Virginia company referred by Senator 
George Allen's office to gain access to the Canadian market for 
agricultural equipment.
     In June, after inquiries initiated by our Compliance Team, 
Taiwan announced that it would recognize National Marine Manufacturing 
Association certification for U.S. recreational water craft exported to 
Taiwan. U.S. companies can now sell pleasure boats to Taiwan without 
having to undergo additional and costly inspections and will no longer 
be required to make modifications to their boats to meet Taiwan-
specific requirements.
     We worked with a small Oregon manufacturer of bicycle 
trailers that was concerned about a proposed German regulation 
requiring brake systems for its bicycle trailers; our team worked 
closely with the company to convey to German officials our industry's 
technical comments and concerns with the safety implications of the 
proposed amendment. These efforts proved successful, and, in early 
July, the German authorities agreed to drop the regulation, allowing 
the company to continue to enjoy increased sales to Germany, its 
largest export market.
    As one of my first actions as Secretary, I expanded our compliance 
liaison outreach to include the Congress. I asked all Members of 
Congress to identify a staff person to work with our Compliance Center 
to refer constituent market access or compliance problems. If staffs 
are not already working with us on this effort, I hope they will. The 
Trade Compliance Center also maintains a ``Trade Complaint Hotline,'' a 
service that allows U.S. exporters, especially small and medium-sized 
firms, to file market access and trade agreement complaints online.
    We also learn about potential problems from all different parts of 
the Department. Sources include the worldwide network of the 
Department's Commercial Service and Export Assistance Centers 
throughout the United States, our industry and country desks, and trade 
agreement specialists. For example, we received a complaint through our 
Columbia, South Carolina Export Assistance Center from a small company 
that was unable to sell its chemical product in Sweden because it was 
required to divulge proprietary information to a Swedish local 
government body. The Compliance team worked with the Swedish government 
to resolve the issue, resulting in an $8 million sale for the company.
    Let me emphasize that our goal is to solve problems at a practical 
level. Once a problem is identified, a compliance action team analyzes 
it, develops a strategy and then applies compliance advocacy, in the 
form of calls, letters, area meetings between Departmental and foreign 
government officials--beginning at the staff level and working on up to 
me as needed. If, and when, that is not possible, we help build cases 
that USTR (U.S. Trade Representative) can litigate at the World Trade 
Organization or in other formal dispute fora.

Combating Unfair Trade Practices
    While it does not always entail the enforcement of our trade 
agreement rights, I am just as committed to ensuring that we are 
aggressively investigating allegations of subsidies or dumping under 
our trade laws. There is nothing more dispiriting to American workers 
and farmers than to believe that they are not competing on a level 
playing field.
    When our companies complain about unfair trade practices, our 
office of Import Administration (IA) is responsible for investigating 
the claims, ordering the imposition of offsetting duties, as well as 
seeking to eliminate the governmental interference or underlying 
distortions in the market that gave rise to the U.S. industry's 
complaint in the first place.
    ITA's Import Administration unit also plays a lead role in 
monitoring trade agreements in the antidumping and subsidies arena. IA 
provides much of the substantive work on the annual report to the 
Congress on our trading partners' compliance with their subsidies 
commitments, as well as working within ITA and with U.S. Customs to 
ensure the vigorous enforcement of antidumping and countervailing duty 
orders resulting from their investigations.
    In my view, these actions are not only consistent with our 
international obligations and the President's commitment to trade 
liberalization, but essential to them. By way of example, the security 
of America's softwood lumber industry and lumber jobs has been a key 
priority for me since I took office. In response to Congressional and 
industry concerns, on April 3, 2001, I initiated a Lumber Import 
Monitoring Program to keep track of import levels and detect 
destabilizing surges. We have been using a number of methods to ensure 
that we have the most current information available regarding the level 
of lumber imports. High-level Commerce officials have visited U.S. 
ports and have met with Customs staff in order to share information and 
educate them on our monitoring plans. As part of this plan, in order to 
get the most timely and accurate information, we secured the early 
release of preliminary softwood lumber data.
    Following the expiration of the Softwood Lumber Agreement, my 
Department initiated two lumber investigations on April 23, 2001, to 
determine if softwood lumber imports have been unfairly subsidized and/
or sold at dumped prices. We have teams of professionals hard at work 
ensuring that the investigations are conducted expeditiously and in 
full compliance with our unfair trade laws. You can be sure that we 
will enforce our laws vigorously where it concerns softwood lumber. We 
are taking a serious look at the allegations of critical circumstances 
and will take all steps to ensure effective and speedy relief.
    I believe that the Congress well understands the necessity of 
finding solutions to address underlying market distortions. That is 
why, as part of the implementing legislation for the Uruguay Round 
Agreements, the Congress created the Subsidies Enforcement Office in IA 
to assist the private sector in fighting foreign subsidies. In 
addition, the Congress passed the Compliance Initiative for the fiscal 
year 2001 budget, providing compliance funding for several agencies, 
including the International Trade Administration's Import 
Administration and Market Access and Compliance units, which are 
expanding their activities. One key part of this expansion is the 
development of an overseas trade compliance team with staff in Beijing, 
Tokyo, Seoul, and Geneva.
    Mr. Chairman, thank you for your support of the Compliance 
Initiative. I am committed to aggressive enforcement, and so is the 
President. He is asking us to go beyond investigating unfair practices. 
We seek to eliminate unfair subsidies, and the inefficient, excess 
capacity propped up by such subsidies. We are looking to find a way to 
get rid of the governmental interference and underlying distortions in 
the market.

                            EXPORT PROMOTION

    Mr. Chairman, there is a third element to our approach to trade 
that is designed to reinforce what we do at the negotiating table and 
what we do in the way of compliance and enforcement. I am acutely aware 
that negotiating trade agreements, even with full compliance, will only 
take us so far. We need to ``fill in'' behind those agreements. For our 
economy to benefit fully from our efforts to open new markets, we need 
to expand the base of exporters and provide the promotional support 
they need to compete in the global marketplace, particularly our small 
and medium-businesses.
    That, in fact, is an element that has been missing from our trade 
strategy to date and the President and I aim to rectify that situation. 
To take full advantage of the markets we open at the bargaining table, 
small businesses, in particular, need to get information, expertise, 
support and financing to do the deals that our agreements have made 
possible. This requires the coordinated effort of all of the Federal 
agencies involved in export promotion process.

Benchmarking Best Practices in Export Promotion
    Fortunately, we have the right management tool in place--the Trade 
Promotion Coordinating Committee (TPCC), which was created by Executive 
Memorandum in 1990 and then adopted by the Congress in statutory form 
in 1992. The TPCC, which is comprised of 19 agencies, works on behalf 
of small businesses by working to coordinate government export 
promotion programs.
    The TPCC has, for example, streamlined financing for small 
business, resulting in a quadrupling of the value of exports supported 
by the working capital programs of the Export-Import Bank and the Small 
Business Administration (SBA). Recently, the TPCC organized a series of 
seminars in Baltimore, Los Angeles and Chicago, during which officials 
from the Commerce Department, USTR, SBA, and the Export-Import Bank 
provided information to small firms about business opportunities 
arising out of recent trade legislation.
    We have a plan for taking the TPCC back to its roots as a 
management tool by undertaking a benchmarking exercise that will help 
us better serve our small business customers. Our goal is to ensure 
that we offer them world-class export promotion services in support of 
their efforts to take advantage of the new opportunities created by 
recent trade agreements.
    As the Chair of the TPCC, I have received the commitments of the 
heads of the member agencies to undertake this innovative benchmarking 
review and have established a timeline for its completion. We will 
assess our customers' expectations and their level of satisfaction. We 
also will compare our business processes to those in other government 
agencies and the private sector to determine whether we are making use 
of best available practices. We intend to produce an interim report to 
the Congress at the end of September and provide a full report on March 
30 of next year. This report will include recommended reforms of our 
programs and services.
    It is more important than ever that our policy and promotion 
efforts on behalf of small businesses are coordinated and mutually 
reinforcing. Our goal is to provide the American people, and the small 
and medium-sized exporters in particular, the most efficient, 
strategically focused, well-coordinated and customer-driven programs 
possible.

Innovative Support for Small Businesses
    Mr. Chairman, earlier I mentioned the importance of international 
trade to small business. Accordingly, I have placed a high priority on 
helping our small and medium-sized businesses benefit from our trade 
agreements. The Department of Commerce has a worldwide network of 1,800 
employees who strive to help U.S. firms realize their export potential, 
with an emphasis on outreach to small and medium-sized enterprises.
    We have Commercial Service officers posted in 160 locations in 85 
countries abroad; they are our ``eyes and ears'' on the ground, sharing 
information with Commerce headquarters and our district offices. Our 
105 U.S. Export Assistance Centers (USEACs) throughout the Nation offer 
export counseling, market research, trade events and international 
finance solutions to U.S. exporters. During fiscal year 2000, these 
centers counseled 12,955 U.S. companies, nearly all of whom were small 
and medium-sized.
    The Commerce Department also has developed a number of high-quality 
tools to facilitate small and medium-sized enterprises (SME) exports. 
We offer free, online export finance Matchmaking and organize 1-day 
Creative Export Financing Seminars throughout the United States. Our 
Web portal--export.gov--consolidates export information into a single, 
customer-focused site.
    This allows small businesses to quickly and easily identify sources 
of information on every stage of the export process--from finding a 
partner to getting paid. In addition, we have just added the capability 
to help SMEs transact international business online. Under this 
``BuyUSA'' addition to our Web portal, U.S. exporters are matched with 
qualified international business partners and can also take full 
advantage of one-on-one export counseling from the local USEAC. Our 
Trade Information Center, with its toll-free telephone number, also 
provides counseling. During fiscal year 2000, the Trade Information 
Center handled 85,401 direct inquiries and had 645,284 Website hits--
many of which came from small businesses.
    From multi-billion dollar infrastructure projects to the strategic 
contracts for small businesses, our Advocacy Center fights to win deals 
for U.S. businesses and jobs for U.S. workers. Since its inception in 
1993 to July 2001, the Advocacy Center recorded more than 160 advocacy 
successes for SMEs, totaling approximately $3.9 billion, with over $2.2 
billion in U.S. content.
    Mr. Chairman, it is clear that SMEs would be among the major 
beneficiaries of negotiations that reduce foreign barriers to U.S. 
exports. The number of SMEs that export merchandise soared from 108,026 
in 1992 to 198,101 in 1998. These figures count only firms that export 
goods directly, and do not include suppliers whose inputs are exported 
in final products or services exporters. For example, nearly 200 
companies in 27 states, representing about 75,000 other jobs, provide 
parts for the Case III MX Magnum tractor that is exported from the 
CaseNewHolland plant in Racine, Wisconsin.

                 TRADE NEEDS TO WORK FOR ALL AMERICANS

    Mr. Chairman, we need to make our trade agreements work for all 
Americans. We need to engage in a dialog that will help us move forward 
as a Nation with the full support of the Congress for our efforts to 
open new markets for American goods, services, and ideas.
    But, I would be remiss if I did not emphasize that it will take 
more than an active trade agenda, solid enforcement of trade 
agreements, and export promotion to succeed in the global marketplace. 
In the end, we need to make certain that America remains a place in 
which individuals want to invest their time, their talent, and their 
capital. That will require a commitment to get the economic 
fundamentals right and ensure a constantly improving quality of public 
education not only for our children, but for those already in the 
marketplace. It will also require a sustained commitment to help those 
affected by the economic adjustment that invariably attends changes in 
our economy.
    I look forward to working with you, Mr. Chairman, and the Members 
of the Commerce Committee to address those challenges as well. Thank 
you for inviting me to provide our views on trade and I welcome your 
questions.

    The Chairman. Mr. Secretary, you note, as you did before 
the Finance Committee, that everybody is getting trade 
agreements everywhere and we are just being left behind. Of 
course, that is not the case. The situation is that we have 
already entered into the World Trade Organization with 124 
countries, whereby at the time Secretary Cantor was saying this 
agreement gives us the level playing field we have sought in 
trade. For the first time, all the nations of the world will be 
signing onto the same set of trading rules, rules that are 
modeled after and shaped by our commitment to open markets and 
expanded trade. There will be no free riders.
    Now we have Vietnam, Jordan. We just got sub-Sahara. We are 
making trade agreements. Like I say, President Clinton had 234. 
So we are not being left behind.
    But mentioning that office, and that is why we got it--that 
is a recent office, because I have watched the history of this 
thing. I remember way back we found out that this Committee, 
Commerce--it used to be the Committee on Interstate and Foreign 
Commerce--since we were not doing the job, Senator Pastore over 
on the Finance Committee put in the Special Trade 
Representative.
    In the last administration we put in the Office of 
Compliance. Why did we do that? Because we look right here, 
this ``Foreign Trade Barriers'' put out by the Special Trade 
Representative's office. That thing gets bigger and bigger. 
There are 68 pages in here of non-compliance by Japan. We can 
go down all of the countries.
    So I am finding out that I am making more and more 
agreements and getting less and less. In fact, I have gone 
from, even in agriculture, way down now. I am losing out in 
agriculture. Someone mentioned automobiles a minute ago with 
Mexico. I have got a billion dollar deficit in the balance of 
trade in automobiles alone with Mexico.
    I find out that, as you would say before the jury, the 
weight of the evidence, this is it. You folks put it out. That 
is your administration, and here it is. That is our big 
problem. We keep getting Secretaries and others coming up and 
telling us what a grand thing it is, and we keep losing out.
    I have lost 42,100 textile jobs since NAFTA started down 
there to Mexico. They are closing down and all going out of 
business.
    So we cannot just stand by and continue with the same 
litany that we have got compliance and it is a wonderful thing 
and everything of that kind.
    What did you say about all of these violations here?
    Secretary Evans. Well, Senator, you know, when you enter 
into trade negotiations with any party around the world I think 
you have to--there are three thoughts, there are three 
principles that you ought to think through and be conscious of. 
One is make sure that you do your best, your very best effort 
in negotiating on behalf of the American workers and American 
businesses.
    But once that agreement is signed, then you have to make 
sure that it is enforced and that all parties are compliant.
    You raise a very valid point. I mean, when I look at areas 
of compliance I get concerned. It has been one of the areas 
that I focused on just this past couple of weeks, is the area 
of trans-shipments.
    I listen to the fact that we do have a trans-shipment 
problem and the fact is, there are goods being shipped from one 
country to another country and a label put on them, and then 
the goods are shipped into America, and the Customs will catch 
that plant or country that violates the agreement and then we 
get it into our Justice system and there is no enforcement, 
there is no follow-through.
    So when it comes to compliance, I do not think there is 
anything more important than making sure that when we sign 
agreements all parties understand that they are going to comply 
with the agreements. We ought to have the teeth and we ought to 
have the resources, and I thank you for adding the resources in 
the Department of Commerce. I know in the last budget you added 
$12.8 million, and we are in the process of adding 65 community 
officers in our trade community sector, which will be helpful.
    But it is an area that is very important to us and we ought 
to be focused on it. I talked to Attorney General Ashcroft 
about this whole area of trans-shipments. I mean, the fact that 
we have laws in place and cannot enforce them and do not hold 
people in compliance is disturbing to me.
    So I hear what you are saying. I mention two points in 
terms of, first, we have got to make sure we do a good job at 
the negotiating table and negotiate a good, sound agreement on 
behalf of the American people, and then we have to make sure 
these agreements are enforced. Then we also have to make sure 
we follow up with trade development and we make sure that we 
can open up markets for our small and medium-sized businesses.
    But compliance is very important and we have added some 
resources to that area. Maybe we need to add some more. But I 
do not think that ought to prevent us from moving ahead with 
opening up markets around the world.
    The Chairman. That is the point. We are trying to open up 
the markets. We have not opened up with Japan. This is just a 
few years ago, the same edition by the Special Trade 
Representative. Incidentally, this is a bipartisan complaint 
that I have. I could not get the Clinton Administration--and I 
am glad to have your testimony this morning that we are going 
to start enforcing it.
    But you can see in the last few years it just doubled in 
size. In other words, I am getting more and more agreements, 
less and less compliance. We are not into Japan yet, 50 years 
later. Somehow we ought to learn that market forces operate. In 
other words, the day of the blooming aircraft carrier and atom 
bomb is gone. Market forces.
    China: we had an agreement in 1989 to investigate them on 
human rights. The Chinese went all around into Africa and down 
to Australia and everywhere else and we have never had a 
hearing, and just 3 months ago we got kicked off the Human 
Rights Commission in the United Nations. Market forces operate.
    We find Secretary Powell, who has just returned, like you, 
from Russia. He was trying to get them, admonishing them, the 
headline this morning, to please live up to their agreements. 
But we keep on hearing this thing and that is our frustration, 
because it gets--you know, there is an old saying in your back 
yard and mine: ``there is no education in the second kick of a 
mule.'' We have been kicked around here for 50 years.
    Let me yield to Senator McCain.
    Senator McCain. Well, thank you, Mr. Chairman.
    Secretary Evans, you did business in the State of Texas 
before you came here to Washington. What has been the impact of 
the North American Free Trade Agreement on the economy of your 
State?
    Secretary Evans. Well, Senator, it has been a very positive 
impact, as it has been, I think, on the country. I mean, I see 
we have had a very healthy economy in the State of Texas for 
the last 6, 7 years since the initiation, since the 
implementation of NAFTA. I have seen the same thing with 
respect to the national economy. The national economy obviously 
has performed very well over the last 7 years. I think that is 
in part because of NAFTA and the Uruguay Round.
    So it has been a very positive impact on the State of Texas 
on balance and also on the U.S. from what I can see.
    Senator McCain. Well, I think another important factor is 
the effect on the economy of Mexico. We all know that as long 
as the Mexican economy is dramatically worse than ours, Mexican 
citizens will continue to try to come to the United States to 
find work. Yet in my visits, I see that the best and healthiest 
part of the Mexican economy is in northern Mexico, where the 
Free Trade Agreement has had its greatest effect.
    I would appreciate if you would submit for the record not 
only the benefits to the U.S. economy, and job-related, because 
everybody is entitled to their opinion and obviously, we have 
different opinions on this Committee, but not everybody is 
entitled to their facts. I think it is important that you would 
submit to the record the facts, not only as far as the impact 
on the United States economy, but also the Mexican economy, 
because we know we continue to have significant problems of 
illegal immigration, drugs, etcetera.
    [The material referred to was not provided to the 
Committee.]
    Have you got, off the top of your head, information 
concerning the impact on the Mexican economy of the North 
American Free Trade Agreement?
    Secretary Evans. Senator, I do not have information off the 
top of my head. I likewise met with Minister Derbez yesterday, 
and he talked about his economy. We were talking about our 
economies right now. He said that, he referred to the border 
states in Mexico and the strength of those border states as a 
result of NAFTA, and he feels like that those border states are 
doing well through this slowdown period.
    But I will be glad to get you some specific facts and 
specific numbers as to what it has meant for the Mexico 
economy.
    Senator McCain. You know, one of the interesting things 
about the recent election in Mexico is that Mr. Fox's strongest 
support was, guess where? Where the economy was the healthiest, 
in the northern part of that country. I took no sides in that 
election. No American had the right to. But it is interesting 
that, for the first time in 70 years, there is another 
government in power in Mexico, and this government clearly has 
already taken some steps that I think are important, including 
the extradition of drug dealers to the United States of America 
for the first time, as well as increased cooperation on the 
border on drug enforcement and other issues, as well as some 
very innovative ideas that President Bush and Presidente Fox 
are sharing in ways that we could relieve our immigration 
difficulties as well as addressing some of the drug problems.
    I thank you, Secretary Evans, for being here. I thank you 
for your commitment to free trade, which is really what 
President Bush also campaigned on in his campaign for the 
presidency. I am glad to see that the President is standing up 
to what is clearly blatant protectionism, which is on the rise 
in the Congress of the United States and, unfortunately, to 
some degree around the country. I thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    The Chairman. Senator Allen.
    Senator Allen. Thank you, Mr. Chairman.
    To follow up on just a comment on what Senator McCain was 
saying; generally speaking, what I think has been seen is when 
we do have these trade agreements--obviously, my main concern 
is what is the impact on Virginia, what is the impact on the 
people of America. But usually when you have a good trade 
agreement, the United States exports more than whatever that 
product or good may be. You are exporting our concepts, our 
constitutional principles of due process, of private property 
rights, the rule of law, respect for private property. So that 
is very, very important, I think, for all human beings. So that 
is I think our best export of all, and that is our concept of 
individual liberty and freedom and protection of human rights.
    Now, on the issue of compliance that the Chairman brought 
up: it has come to my attention, I am sure you are no doubt 
aware, about the serious and rising disparity in market access 
between the United States and the Korean automobile markets, 
with the Koreans increasing sales in the United States by 
double digits annually over the last 3 years, to nearly 700,000 
cars projected this year.
    Now, I find nothing wrong with that. That is good for our 
consumers, that they are able to purchase and have the choice 
and opportunity to purchase these quality automobiles, and I am 
not saying that we ought to stop those cars from coming in and 
our consumers from purchasing them if they so desire, competing 
with cars made in this country or elsewhere in the world, 
wherever the company is headquartered.
    But when they sell 700,000 cars here, all foreign 
automakers in Korea sold just 4,414 cars last year. Now, that 
is all. That is not just U.S., that is Japanese, German, 
French, Italian, and whatever, Czech, everything. So it is an 
issue of great concern for those who are involved in the 
automobile industry.
    There has been this U.S.-Korea auto agreement in place 
since 1998. Yet there has been no apparent opening of the 
Korean domestic auto market to U.S. automakers.
    So my question to you is, for me and for everyone, what 
will you do, along with the Bush Administration, the rest of 
the Administration charged with overseeing this U.S. trade 
policy agenda, to ensure that Korea opens their markets to our 
U.S. autos?
    Secretary Evans. Well, Senator, as you mentioned, we signed 
an MOU with Korea in 1998 and I think there were four basic 
parts to it. One of the key elements of the MOU is perception. 
Korea for many years has had this buy-Korea kind of campaign, 
and when President Kim was here earlier in the spring I spoke 
with him about this very issue, that we were concerned that--
the numbers I had was that we were importing 426,000 cars from 
Korea and the U.S. was exporting to Korea 1,200 cars.
    I do not understand putting an MOU in place in 1998 with 
the idea of addressing this wide disparity and looking at it 3 
years later and nothing has happened. So that was the point I 
tried to express to him: what is the purpose of signing 
agreements and MOUs with principles of how we are going to 
close the gap and nothing happens.
    So all I can tell you is that I guess at the highest level 
we have expressed our concern, we are going to meet on it again 
and keep the pressure on and monitor it. You know, back to 
Senator Hollings' earlier comments about compliance, this was a 
memorandum of understanding. I realize it does not carry the 
same weight as a trade agreement. But still, you are agreeing 
to try and close the gap.
    Back to what Senator Hollings was saying earlier about 
compliance, we have got to, as we move into opening up markets 
around the world, we have got to make sure the playing field is 
level and we are all playing by the same rules and these 
markets are going to be accessible to us. It does not look like 
to me that the Korean auto market right now is very accessible 
to American workers.
    So I do not know anything that dispirits our workers or our 
businesses any quicker than to think that there is not a level 
playing field out there, that we are not playing on a level 
playing field with the Korean auto workers today. We do not 
mind competing with them, but the idea that they are shipping 
450,000 cars over here and we are shipping 1,200 cars over 
there, there is something that is not right.
    So anyway, all I can say is we will keep the pressure on 
and we have mentioned it to President Kim and we will follow up 
on it.
    Senator Allen. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Secretary, I want to help you with your trade 
agreements. I am basically a free trader. Let me describe to 
you what happened under NAFTA in Florida, recognizing that not 
only do we have an obligation to represent the interests of the 
country in our votes, but we also have an obligation to look 
out after our own people.
    In the passage of NAFTA there were side agreements to 
protect the winter vegetables in Florida, primarily tomatoes.
    Those side agreements were not kept. As a result, whereas 
90 percent of the winter vegetables used to come from South 
Dade County, that is now down to about 35 percent. One-hundred 
tomato farmers, as a result of that side agreement being broken 
in Florida, have gone out of business. Twenty-four 
packinghouses have gone out of business.
    Now, since I want to help you, what would be your advice to 
me as we approach, first of all, this Fast Track, and then 
later on, additional trade agreements?
    Secretary Evans. Well, again my counsel would be that we 
want to work with you in enforcing side agreements or trade 
agreements. If these side agreements are not being enforced and 
we need to take action, then we are ready to do it. One of the 
initiatives that we started in the Department of Commerce was a 
compliance outreach program, and we have asked each Member of 
Congress to designate somebody in their office that we can 
communicate with to deal with compliance issues.
    What I would say is let us sit down with your team and let 
us look at this in a very deliberate way, and if people are not 
in compliance with the agreements then we will take the 
necessary steps. I am somebody who believes in results, and we 
see a problem, I want to deal with it.
    Specifically, I do not know the depth of the tomato issue 
right now to respond other than that.
    Senator Nelson. That is very helpful and that with regard 
to trade agreements already made. Now, as we get to looking 
about trade agreements in the future, give me your ideas about 
congressional consultations, even to the point of having a 
congressional trade adviser in overseeing the negotiations, so 
that we have direct congressional involvement in the 
negotiation process?
    Secretary Evans. Well, it is certainly about a partnership. 
It is certainly about trust. It is certainly about working 
together when it comes to negotiating trade agreements. Exactly 
what form that takes, whether or not there is a specific 
committee or a specific individual, I am not sure. But there 
should not be any confusion at all about the principle of an 
active dialog and cooperation and a spirit of cooperation 
between Congress and the Executive Branch when it comes to 
negotiating trade agreements.
    What trade promotion authority should do for us is define 
the objectives and define the parameters by which you would 
expect the President to return a trade agreement to this body.
    But along the way there needs to be active dialog, and I 
think we are taking steps that we think are constructive in 
facilitating that.
    Take the Free Trade Area of the Americas. For the first 
time ever, we have said that needs to be, as we go through the 
draft and go through the work in progress, it ought to be a 
public document, it ought to be out there for everybody to look 
at and review and discuss.
    So, I do not know any better way to provide for, to 
facilitate an active kind of discussion, than to lay it out 
there as you are going through the negotiation. So I think the 
Free Trade Area of the Americas, the first time ever we have 
said, that I know about--I have been told it is the first time 
ever--that we are going to take this trade agreement that we 
are negotiating and let everybody look at it and talk about it, 
and what are your concerns and what should we be thinking 
about.
    I think that it is a lot about trust, and it is a lot about 
trust that we will work with you and listen to you and talk you 
through the process. But the principle of the President having 
the authority to sit down at the negotiating table, on behalf 
of the American people, and negotiate an agreement that he 
would bring back to the Congress for an up or down vote, I 
understand that principle when it comes to leading on trade.
    If America really wants to lead the world on trade, then I 
think that is authority that the President needs to have.
    But never lose sight of the fact of the important role--the 
good Chairman mentioned it earlier--in the Constitution. I have 
great respect for what the Constitution says, of course, to the 
responsibility of Congress when it comes to trade. So there is 
no question about us understanding this authority and the 
importance of it and what the Constitution says about it with 
respect to the Congress.
    Again, I think it is a partnership, it is working together. 
I do not know exactly what the mechanism is or exactly whether 
or not there is a certain person or a committee or whatever. 
But the principle of openness and dialog through the 
negotiations, I think, is important.
    Senator Nelson. Well, I certainly embrace partnership and 
mutual understanding, particularly with regard to our role, as 
you noted, in the Constitution, of advising before we consent. 
I respect that you might not want to offer a particular 
conclusion about Congressional trade advisers in the course of 
the negotiations. But I wish you would get back to us as to 
what you conclude, recognizing what you say about the 
Administration negotiating on its own.
    But the fact is that you have got folks like me that want 
to help you, but we have also got to look out for our people, 
and we see how we have been burned. An example is the tomato 
farmers. So perhaps we need to be a part, or a representative, 
or an adviser as a part of that process, instead of just having 
a take-it-or-leave-it kind of decision that we would have to 
make.
    Mr. Chairman, I will wait for a second round here. I have 
got a couple more questions.
    The Chairman. Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you very much. I have a 
markup in the Energy Committee and so I have been delayed and 
was not here when you opened. I regret that.
    Mr. Secretary, thank you for being here. I must say I am a 
big fan of yours. I was happy to support your nomination, am 
pleased that you are where you are. But you should know that I 
will be an aggressive opponent of so-called Fast Track Trade 
Authority, and I want to take just a moment to explain why, and 
then I do have some questions if we have time.
    I think this country has lacked backbone, will, and nerve 
in dealing with our trading partners. We have done it 
consistently. I think I could blindfold myself today and listen 
to you and I could listen to the Clinton Administration and the 
Bush Administration and the Reagan Administration and if the 
voice were distorted I would not know which Administration was 
speaking.
    It is always that everything is working just fine, when, in 
fact, we are sinking deep into a pit of trade deficits that are 
growing and growing and growing. I would say to my colleague 
Senator Nelson, the only way you can reconcile what is 
happening in Florida relative to the trade agreement, NAFTA, is 
to ignore the facts. Only then can you say this is a resounding 
success.
    Let me demonstrate why that is the case with some 
statistics. Let me before I do that, say that I would say to 
this Administration, as I said to the previous Administration, 
why do you not, if you are interested in Fast Track, fast track 
some solutions to the problems created by the recently 
negotiated trade agreements before you ask that we fast track 
legislative procedures so that we can do new trade agreements.
    Those problems created by previous trade agreements are 
limited to, but not exclusively, stuffed molasses from Canada, 
by which Brazilian sugar comes in in the form of molasses as a 
carrier, and then the sugar is unloaded and it goes right back, 
the molasses goes back to Canada. So that is the way we slip 
Brazilian sugar into this country.
    Korea: 450,000 to 500,000 Korean cars into this country. We 
ship 1,200 to 1,400 to Korea.
    How about potato flakes? Raise some potatoes in the Red 
River Valley, flake them and send potato flakes to be used in 
fast food to Korea. Guess what? They impose a 300 percent 
tariff on potato flakes, for God's sake.
    Japan, 12 years after the last Japanese-U.S. beef 
agreement, which our negotiators celebrated, there is a 38.5 
percent tariff on every single pound of beef going into Japan 
from the United States. Put a T-bone steak into Tokyo, a 38.5 
percent tariff on it, 12 years after the beef agreement.
    China--I guess I will not go on, but you get my point.
    I could go through 15 or 20 of these. The point is we have 
recurring dramatic problems, no one lifts a finger to help.
    Everyone says, yes, we have got problems, we are going to 
``monitor.'' That is what the Clinton Administration said. It 
is what every Administration says, and nothing ever happens.
    The merchandise trade deficit is about a billion-and-a-half 
dollars, a billion-and-a-third dollars a day, every single day. 
It is a relentlessly growing trade deficit that weakens this 
country.
    Mr. Secretary, while we disagree on this, I have great 
respect for you, but NAFTA has been a disaster for this 
country. We turned a very small surplus with Mexico into a very 
large deficit. We took a moderate deficit with Canada and much 
more than doubled it. NAFTA has, in my judgment, been a 
disaster for our country, because it was also, in my judgment, 
incompetently negotiated, as have been many of our recent trade 
agreements.
    You have, Mr. Secretary, about seven to nine people 
monitoring all of our China trade down at the Department of 
Commerce. You have, I think, seven people monitoring Japan 
trade, 13 people monitoring trade with Canada and Mexico. In 
all of those cases, those are fewer people than you used to 
have at Commerce, because enforcement has not been something we 
have been very interested in.
    We want to rush off and negotiate a new agreement. That has 
always been our deal: Go rush off and negotiate a new 
agreement. Our negotiators have been able to lose in the first 
week or 2 with every trade round. I just am tired of it. I am 
not going to support additional Fast Track.
    I will say this: Let us agree, this Administration and this 
Congress, to start fast tracking some solutions, just three or 
four. Fast track a few solutions to say that we are serious 
about this, and then let us get together about what kind of 
trade agreements we want in the future.
    Sorry you had to listen to that, but it is important. It is 
therapeutic for me to say it.
    Let me ask the question, if I have any time left: How on 
earth could not only this Administration, but the previous 
Administration, which is of my party, how could anyone tell me 
that our trade agreements are working when the trade agreements 
are producing trade deficits that are spiking in a very 
dramatic way. Our current merchandise trade deficit is roughly 
$450 billion a year, up dramatically. How can that be a sign 
that the trade agreements are working, Mr. Secretary?
    Secretary Evans. Well, I guess my own perspective is, 
Senator, I have got great respect for your views, of course. 
But my view is that I look at the American economy over the 
past 10 years and we have gone through one of the most robust 
periods of growth we have in the history of America. When I 
travel around the world talking to other leaders, they are 
amazed at the power of our economy to generate and create jobs.
    We created some 20 million jobs during the decade of the 
1990s. When I look at our overall unemployment in America, I 
see it down at some of the lowest levels we have seen in over a 
generation. So when I look at kind of the macro numbers of our 
economy, I see good signs. Obviously, the economy today is not 
doing what we would like for it to be doing, but there are some 
good healthy signs.
    Senator Dorgan. Are you concerned about the trade deficit?
    Secretary Evans. I am concerned about the growth of the 
economy, of the American economy. I am concerned about growing 
jobs. I think what we do--my view is what we do is try and 
create the environment, create the framework by which our 
economy will grow and prosper and will generate, create 
economic growth, create new jobs, create a higher standard of 
living.
    I think there are a lot of parts to that. I think monetary 
policy, I think fiscal policy, I think trade policy, 
regulations and rules that we pass is a part of the framework 
that is an environment for this economy, are all part of what 
shapes the American economy.
    So I am concerned that we have a friendly kind of 
environment for this economy to continue to grow. So when I see 
gross domestic product growing at over 3 percent throughout the 
1990s; when I see unemployment rates down at--it got down to 
3.9; I guess it is 4.5 now--and I look at other economies 
around the world, I feel like our economy, over the last 10 
years or so, is certainly one to be proud of.
    Senator Dorgan. Mr. Chairman, I know that my colleagues 
want to ask additional questions. I do as well.
    The Chairman. We will come back.
    Senator Dorgan. I do want to further plumb the issue.
    The Chairman. Absolutely.
    Senator Nelson. Mr. Chairman, before the gentleman from 
North Dakota leaves, I just want to say he raised as an example 
of abrogation of trade agreements bringing sugar through Canada 
in the form of some hardened state that then is reconstituted 
in America. Now, that is not what the trade agreement is 
supposed to be, and yet it is being done.
    So what we would like is we would like you in the Executive 
Branch of government to stop it. If we have to supply you with 
some additional tools in law, then we clearly want to do it. 
But it is an example. It came close to home, because there is a 
lot of sugar in Florida. And what is the agreement on trade 
with regard to sugar, which affects his constituency as well, 
is being broken.
    We would like to see some resolve so that it would stop 
being broken and stop adding to the thickness of that big red 
book over there.
    The Chairman. Mr. Secretary, do you want to comment, or let 
me comment?
    Secretary Evans. I want to hear.
    The Chairman. What happens is you heard my colleague to the 
right about protectionism. Free trade, everybody is for free 
trade. It is like world peace, it is how you get it. That is 
what we are talking about.
    Jobs are not just jobs, creating jobs. It is creating 
manufacturing jobs. Let me go to Akeo Morita. It was almost 20 
years ago in a seminar in Chicago, lecturing these emerging 
nations, and he said the Third World emerging countries could 
not become really a nation-state unless they created a strong 
manufacturing capacity. And he said, and Senator, because I was 
there, later on he said: ``And by the way, that nation that 
loses its manufacturing capacity, that world power, will cease 
to be a world power.''
    Now, after World War II, we had 41 percent of our work 
force in manufacturing. By 1965, we had 29 percent. I have just 
checked and now we have got 12 percent. Yes, jobs.
    Barbara Einrich, ``Nickel and Dime,'' she talked about the 
jobs.
    They are all cleaning up, tourism jobs, making beds, 
flipping hamburgers and everything else like that. But the 
strong manufacturing jobs, those jobs that create the middle 
class, that give strength to the democracy--our security, like 
a three-legged stool, we have got the one leg of our values as 
a Nation admired the world over with respect to individual 
rights, democracy, human rights.
    The second leg, military, is unquestioned. But the third 
leg, economic, has been fractured as a result of the struggle 
in the Cold War. Now, we predominated, we won. We passed the 
Marshall Plan. We gave up--I will never forget, when I told you 
earlier, I testified 40 years ago. Governor Dewey said to me: 
``What do you expect them to make? Let them make the shoes and 
the clothing and we will make the airplanes and computers.''
    Well, I am looking here and over two-thirds, around 70 
percent of the clothing I am looking at is imported. 86 percent 
of the shoes on the floor are imported. They are making not 
only the shoes and the clothing, but the airplanes and 
computers.
    That gets me back to your statement. This is what you 
stated just a couple of weeks ago here before the Finance 
Committee: ``In other words, free trade lets us focus on what 
we do best.''
    What do we do best?
    Secretary Evans. Compete.
    The Chairman. How? How do we compete when we are losing all 
these manufacturing jobs? I mean, what do we make best? What do 
we create best that someone else does not?
    Secretary Evans. Well, Senator, I think that the economy is 
saying that we are creating a lot of things best. Again, when 
you look at the growth of our economy and you look at the jobs 
we are creating, these export jobs pay some 13 percent to 18 
percent more than the national average. But I think there is a 
wide variety of products that we make best, obviously in the 
whole high tech sector, I would say in the textile sector.
    The Chairman. Textiles?
    Secretary Evans. Well, textile exports have been trending 
upwards over the last 4 or 5 years, the last data that I looked 
at.
    The Chairman. Mr. Secretary, right to the point, we do not 
really produce anything best any more. You can transfer the 
technology by computer, you can transfer the financing by way 
of the satellite. You can start up and run your plant from 
Austin, Texas, in downtown Bangalore, India, and they are doing 
it; or Dublin, Ireland, or anywhere else down in Mexico, and 
with the wage scale and everything else.
    My point is we are the trustees of the economy, and the 
economy is not strong. We had to borrow $51 billion yesterday 
in order to mail out rebates. Come on. The economy is not 
strong. I am losing out here and I am being told I am winning.
    The truth of the matter is we did win. I want to give you 
some hope in my little bit of time. Ronald Reagan was good. I 
wanted Zellick to come on up here, because he worked for our 
friend Jim Baker, and it was in his time over there in the 
White House. Ronald Reagan was good; he saved Andy Grove and 
Intel. He put in Sematech. Right here, Senator Danforth and I, 
we put in Sematech and a voluntary restraint agreement on 
semiconductors.
    Now we have a deficit in the balance of trade in 
semiconductors, because of the very thing I just described: 
Intel has built the best and the newest plant for 
semiconductors in Dublin, Ireland, using, incidentally, my 
technical training program. Ask Frank McCabe; he runs the 
plant. I have been there.
    But I can tell you here and now that we are into a 
competition worldwide. The competition is market forces, it is 
not free trade. We are not using our big, fat, rich American 
market in order to really get these deals. We are going to have 
to really raise a barrier in order to remove a barrier.
    President Reagan put it in, voluntary restraint agreements 
on steel, machine tools, semiconductors, and one other thing, 
and I see you folks are moving on steel. Move faster, because I 
have got steel plants. You see, the World Bank goes around over 
there and they run to every little nation-state and say: ``You 
have got to produce the tools of agriculture and the weapons of 
war,'' and they give them a 2 percent steel plant. We have got 
a glut of steel plants the world around, and I am importing 
right over my docks in Charleston, Brazilian steel, and I have 
got the most efficient, Nucor. There is not any question of 
productivity. I have got the most efficient steel plants you 
can find in the world.
    But that is the kind of thing that the Executive Branch--
and I liked Senator Dorgan's comment with respect to the last 
Administration. We worked on them. It is not partisan.
    We love you. We think you are the best Secretary of 
Commerce we have had in a long time. But just do not go down 
the road saying everything is fine and we have got a strong 
economy and we have got the division over there for compliance, 
because it ain't working. I can tell you that. We are going out 
of business.
    Let me yield and let you comment.
    Secretary Evans. Well, look, back to the point on 
compliance. You mentioned our 201 initiative by the President. 
I do not think there is anything more important than sending 
the strong message out there that we are all going to play by 
the rules and there is going to be a level playing field. I 
have seen the additional resources that have been added to 
compliance. It is something that we are going to continue to 
stay focused on.
    If others are breaking the rules, then there need to be 
consequences. On molasses, if rules are being broken, if laws 
are being broken, there need to be consequences. I am not 
confused about that at all. So you just have my commitment and 
assurance from me that you bring to us situations where you can 
show that people are violating the law, violating the rules, I 
am going to do what I can to deliver and make sure that they 
are held in compliance and there are consequences for that.
    The Chairman. Very good. When we saw we are going to lead 
the world on trade, what we are doing, unfortunately, is 
leading the world on trade deficits.
    I mentioned Hamilton and Jefferson a little while ago, 
because the very second Act that passed the national Congress 
in history--the first one was for the seal, but on July 4th, 
1789--was protectionism, a tariff bill of 50 percent on 60 
articles, because Jefferson was looking out for the farmers and 
old Alexander Hamilton was looking out for production.
    David Ricardo came with this same thing about what we do 
best. He said the doctrine of comparative advantage, he said to 
the little fledgling colony: ``Now that you have got your 
freedom, we will trade with you what we do best and you trade 
with us back what you do best.''
    Old Hamilton, ``Report on Manufacturers''--here it is. I 
had to get that from the Library of Congress. The Library of 
Congress has got the only original copy left. But in his 
``Report on Manufacturers,'' Alexander Hamilton said: ``Bug 
off; we are not going to remain your colony, just shipping you 
the iron ore and the timber and the cotton, rice, and indigo, 
the agricultural products, and bringing in the manufacturers. 
We are going to develop our own manufacturing capacity and 
strength.''
    That is why they passed that tariff bill, which Madison 
finally agreed to and joined in and helped it get passed.
    So you have got to protect the economy. You have got to 
build. You have got to have that wonderful economy. You are a 
good businessman, you are a builder, and let us get to building 
and really enforce these agreements, like you have attested to.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you.
    I wonder whether perhaps in the years ahead at some point 
we will scratch our heads and wonder to ourselves why we did 
not understand that you cannot run a $450 billion merchandise 
trade deficit without there being consequences. People felt 2 
years ago the NASDAQ was always going to keep going up and now 
they are scratching their heads and wondering, ``Why did we not 
understand you cannot buy stocks at 150 times price-earnings?''
    I think that the growing trade deficit is of great concern, 
and the fact that we have a growing economy as the trade 
deficit grows ought not be a case to ignore the trade deficit. 
I know a lot of smokers that are having a pretty good time as 
well, but they will have consequences in some cases. So it 
seems to me--I was trying to ask you, do you think the growing 
trade deficit is a cause for alarm or a cause for concern? 
Should there in this country be a designed attempt to address 
the burgeoning trade deficit?
    Secretary Evans. Well, I think the trade deficit is 
something that we should pay attention to. Senator, we import 
about 60 to 65 percent of the crude oil that we consume in this 
country today. That is a substantial part of the growing trade 
deficit. I do not see any change in that trend in the years 
ahead.
    The trade deficit as we have watched it over the last 
several months has been coming back down. It has been drifting 
down from the high of $435 million, whatever the number was----
    Senator Dorgan. Billion.
    Secretary Evans. Billion I mean, over the last--in 2000.
    I think it is also instructive to point to the fact that, 
in terms of net foreign direct investment, it was $269 billion 
more invested here in America from foreign countries than we 
invested outside the United States. So that is, I think, 
another part of this economy.
    But to say that we ought to make any dramatic changes to 
bring the trade deficit down, I cannot see that. As long as our 
economy, we continue to see--again, it is monetary policy, it 
is fiscal policy, it is rules and regulations, it is creating 
the framework for this economy to continue to grow, which I 
feel like it has been at a pretty healthy clip over the last 10 
years.
    Senator Dorgan. Mr. Secretary, I wish I had received an 
answer that is more comforting. I wish you had said ``yes.'' I 
think this is alarming, I think we have a circumstance where we 
have trade deficits that have grown in a way that is not 
healthy for this economy, it increases the current account 
deficits.
    The result of foreign investment is a natural result, in my 
judgment, in running the current account deficit and the 
foreign trade deficit.
    But, having said all of that, let me ask you a question.
    You talked about consequences. Will there be consequences, 
for example, for Canada, who has a Canadian Wheat Board which 
is a state trading enterprise, a monopoly that would be illegal 
in this country, that thumbs its nose at you, at the USTR, at 
the GAO, and at all attempts to get information about the price 
at which they are selling their wheat into this country? We 
allege that they are dumping into this country, they are 
selling below acquisition cost, violating trade agreements, and 
they retain exclusively all of the information by which you 
could make that case. When the U.S. Government requests the 
information, they say: Take a hike.
    Will there be consequences for a country that does that 
with respect to the durum wheat trade?
    Secretary Evans. Well, Senator, I sure think they ought to 
share the information with us. I have not looked at it 
specifically, but I will. I think we have a good working 
relationship with Canada. We are dealing with them on a number 
of issues, softwood lumber, as you know. We took some 
aggressive steps on that issue that I think sent a signal that 
said, look, we are going to monitor and we are going to watch 
and people are going to comply with these laws. We set up a 
monitoring system at the border that allowed us to monitor 
softwood lumber on a daily basis.
    So we have got a good working relationship with them. I do 
not know why that would change.
    Senator Dorgan. Well, we do not have a good working 
relationship. We have been monitoring this for 8 years and the 
Clinton Administration monitored it, the George W. Bush 
Administration monitored it, and through all of this 
monitoring, Canada has gone right ahead and continued this 
terribly unfair trade that has cut the ground out from under 
our farmers.
    Mr. Secretary, I think I mentioned to you when you were out 
for the nomination hearing, I went to the border in a 12-year-
old orange truck with Earl Jensen with a couple of hundred 
bushels of durum wheat. All the way to the border, the Canadian 
trucks were coming south with 18-wheel trucks hauling Canadian 
durum. But Earl and I could not get a 12-year-old orange truck 
through the border, because that border was closed to American 
durum even as they were unfairly putting their durum into our 
marketplace.
    My point is we have monitored this forever. Nobody has ever 
really done anything. Our farmers are still victims. My only 
question is, if the Canadian Wheat Board, which is a monopoly 
that would be illegal here, continues to thumb its nose at this 
country and say, ``We will not allow you access to information 
about how we are selling into this country'', will there be 
consequences? There have not been for the last 10 years.
    I hope you will tell me, yes, there will be consequences; I 
intend to see to it.
    Secretary Evans. Sure. I will get back to you. You bet, 
Senator.
    Senator Dorgan. Let me go back to Korea, because I think 
the question is an important one. If a country like Korea is 
shipping us a half-a-million cars a year, and buys 1,200 or 
1,400 cars from us--why? Well, a fully equipped Ford Mustang 
would cost $55,000 in Korea. Sound unreasonable? Does to me.
    So if that continues, and in 1998 they said, ``Oh, we will 
be better, we will do better.'' It is 2001, and nothing is 
happening, what are the consequences for Korea?
    Secretary Evans. I am not sure, Senator, but I made the 
same point earlier. We signed an agreement 3 years ago. It does 
not look like to me much has happened. What was the agreement 
all about? What was the memorandum of understanding about?
    Senator Dorgan. My point is, nobody ever does anything.
    We lack nerve, will, and backbone to stand up to trading 
partners and say: ``Look, our market is open to you, God bless 
you; our consumers are advantaged by having access to the 
broadest array of products; but understand us, if we are going 
to do that then your market must be open to us.''
    You know how many U.S. movies got into China last year? 
Twelve. Now, some might argue that is an advantage for China. 
But my point is, all across the board, we are being 
shortchanged, because this country lacks will. All we do is 
chant, like these street corner chants: ``Free trade, free 
trade.''
    The fact is, all I care about is expanding opportunities 
for trade in a manner that is fair to American producers.
    When we get to that point, I am going to be the one that 
applauds and says: ``I am on your team; let us go together and 
do this.'' But until that time, I want to see some evidence of 
fast tracking solutions to the problems that have been created 
the last 6 or 8 years. I see no evidence in the previous 
Administration and I want to see some from you. But until that 
time, I do not support Fast Track.
    Secretary Evans. The only evidence that I can point to 
right now is 201 on steel. I do not know anybody else before us 
that wanted to step up and initiate a 201 on steel, and we did. 
I want to look for other opportunities to send a signal to the 
world that if you are going to trade with the United States of 
America, you are going to comply with the agreements, and your 
markets are going to be open to us, and there is going to be a 
level playing field and you are going to play by the rules. I 
welcome more opportunities like steel and initiating a 201 to 
send that message.
    Senator Dorgan. Well, I tell you what. Potato flakes to 
Korea, T-bone steaks to Tokyo, durum wheat from Canada. I will 
give you a dozen or so. Sink your teeth into them, and I am 
going to be on your team.
    But until I see all of that, I will say to you, as I did to 
the Clinton Administration, I think that trade agreements that 
have the capacity to increase our trade deficit are not in our 
interest. But if we can work together to solve problems created 
by the most recent trade agreements, I want to do that.
    Let me finish where I started. I am glad that you were 
nominated by President Bush. I think you have the capacity to 
do a lot of good things. While we might disagree on Fast Track, 
and we will disagree aggressively on that, I want to work with 
you on a range of things.
    This Congress has the responsibility to put money--and I am 
working on that--in your accounts on trade compliance with 
China, Japan, Europe and Canada and Mexico.
    We need to not just ``monitor'' in the ethereal way. We 
need real people monitoring those every day, so that we 
understand what is happening in our trade relationships.
    Secretary Evans. Thank you, Senator.
    The Chairman. Mr. Secretary, we really do appreciate and 
admire your leadership with respect to the 201 steel case you 
raised. We have been trying and trying and trying, and we could 
not get it before the previous Administration, and we commend 
this Administration for its leadership on that score.
    One final thing, because we have got a very important panel 
that follows you, is that you should understand that as the 
Secretary that your best friends are against you on what you 
were attesting to, namely that you were going to enforce 
compliance. The truth of the matter is, when I first came up 
here years back, it was the Japanese representative in the 
office, it was the Korean representative. They do not even 
bother to come, their lawyers. The big business, the 
multinationals--the ``non-nationals,'' I call them--are leading 
the way.
    There is no more admired individual in the business field 
than Jack Welch of GE. Just a year-and-a-half ago, this is a 
BusinessWeek article. He said that they were not going to have 
any subcontractor that did not move to Mexico, and they talked 
about having 30,000 already there. GE even puts on supplier 
migration conferences to help them make the leap.
    Now, what happens is we are exporting the jobs. We are not 
exporting the products. Trade is not for investment. I do not 
see why I should encourage the investment in China or the 
investment in Mexico. I would love to have the investment in 
the United States, but my duty is to try to create the jobs.
    What happens here is after we passed PNTR with China, The 
Wall Street Journal headlined it, it was nothing but an 
investment program and policy. Go right to Doha and Qatar.
    Later here, in November, I think, is the conference. They 
holler free trade because they like to dump, and they come in 
and the dumping violation and everything else like that are not 
enforced now.
    I wish we had your Trade Administration. That is why I say 
let us abolish the International Trade Commission, because we 
find the violation at the level of the Trade Administration in 
the Department of Commerce, but then we go over to that crowd 
in the International Trade Commission and they never find any 
real injury. So the electronics business is gone, and you can 
go right on down the list: Kodak, hand tools, everything else 
like that. The lawyers just said ``Forget it, no use to take 
the case to Washington, because they are going to find against 
you anyway,'' and you have even got them leading now. The 
National Chamber of Commerce is not interested in the Main 
Street merchant in Austin, Texas. He is interested in the 
multinationals, the internationals.
    They are working, like you say, they have got to report to 
their shareholders. So I cannot fault them for that. They are 
making more money. But we are the trustees up here of the 
strength of the economy. You are, I am. It is dwindling every 
day. We are going out of business. We do have this tremendous 
deficit. We are transferring into the haves and the have-nots. 
The take-home pay of the industrial worker is less than what it 
was in 1979. So with all the new jobs and everything, $6 and $7 
an hour, as Barbara Enrich has described, they cannot find a 
place to stay, they cannot keep up their health bills or 
anything else of that kind, and the solution is high tech, high 
tech.
    Silicon Valley, 42 percent of them on part time, no health 
care, no retirement benefits and everything else, and they do 
not create the number of jobs. You know, Bill Gates has got 
20,000, but Boeing has got 90,000. I mean, the real jobs are in 
manufacturing, and in the oil business and certainly not in the 
blooming high tech business. They have fired them all.
    So we really appreciate it. Let me yield for your comment 
and anything else Senator Dorgan wants to say. But we have got 
a roll call here now on the floor.
    Secretary Evans. Senator, I just would say what I did 
earlier: I think this is the time America has got to make the 
decision that we are going to lead on trade. As I look at the 
world economy and consider that in 1970, 10 percent of the GDP 
in the world was trade, and today about 25 percent of it is 
trade, there is not any question in my mind that we are going 
to continue to increase trade in the world.
    When I think about the fact we have got 400 million people 
connected to the Internet today and over the next 4 or 5 years 
that will increase to 1 billion people connected to the 
Internet and 90 percent of those additional people will be 
outside the United States, it tells me that this world is going 
to continue to open up markets. I just think that our economy 
needs the certainty, needs the commitment that America is going 
to lead that effort.
    The way for us to send that signal to our economy, our 
financial markets, our capital markets, our business community, 
is to grant the President trade promotion authority. So I am 
going to, obviously, continue to be up here, continue to work 
on that, work with you, listen to you.
    I appreciate your comments this morning. I got the 
compliance message loud and clear. I am not confused about 
that.
    I have been in office for 6 months. I know it is a big 
concern here. I want to see every opportunity that I can find 
to deliver a strong message that if you trade with America, if 
you sign agreements with America, that you are going to comply, 
and if you do not there are going to be consequences.
    That is exactly why I called Attorney General Ashcroft on 
this whole trans-shipment area. It bothers me that Customs 
catches people and then they get into the Justice system and 
nothing ever happens.
    So when I talked to him, he assigned a task force in the 
Justice Department to look at that and see if that indeed is 
what is going on. Are those cases backing up? And if they are 
backing up, how come? What are we going to do about it? What 
additional resources do we need to put on those cases to make 
sure that there are consequences?
    So will it take more resources to enforce these agreements? 
It might. I know Senator Dorgan mentioned, and I know, Senator, 
you had a big role in adding the resources to our Department to 
increase the manpower. We are adding 65 people. We need to 
continue that.
    So I take away from this hearing this morning the strong 
message about compliance and how important it is and that we 
have not held people accountable in the past and we must. So I 
look forward to working with you in that specific area.
    Senator Dorgan, I look forward to working with you and your 
staff on specific issues. If we can find more that we can send 
a signal, I am ready to send a signal. So far, I think we found 
one big one, and that is steel. We finally have got an 
Administration now that is not going to continue to tolerate 
this subsidization that is going on around the world.
    So anyway, I am delighted to be here. Thanks for the 
message. I got it loud and clear on the compliance.
    The Chairman. The Committee is really indebted. We are very 
appreciative of your appearance here and your approach to this 
problem very much.
    Secretary Evans. Thank you.
    The Chairman. Thank you a lot.
    The Committee will be at ease.
    We will have the next panel: Dr. Edward Luttwak of the 
Center for Strategic and International Studies; Bill Reinsch of 
the National Foreign Trade Council; and Dr. Alan Tonelson, a 
Research Fellow at the United States Business and Industry 
Council.
    We have got a vote.
    [Recess from 11:13 a.m. to 11:30 a.m.]
    The Chairman. The hearing will come back to order. My 
apologies to this distinguished panel. This does not do you 
justice. We are going to have to have you back. The truth is, 
we are trying to end up 2 months work in 2 days here before we 
get out this weekend for the August break. It is like Senator 
Dorgan and others, he has got another markup. I am supposed to 
be at three more. But this is the most important one.
    Let me begin over here with Mr. Tonelson. The full 
statements will all be included in the record. You summarize as 
you wish.

         STATEMENT OF ALAN TONELSON, RESEARCH FELLOW, 
          UNITED STATES BUSINESS AND INDUSTRY COUNCIL 
                     EDUCATIONAL FOUNDATION

    Mr. Tonelson. Thank you very much, Mr. Chairman. Good 
morning. As you said, my name is Alan Tonelson. My 
organization, the United States Business and Industrial Council 
Educational Foundation, and I are greatly honored by your 
invitation to testify this morning. We represent largely small 
and medium-sized manufacturing companies, who are strongly 
concerned about the future of a highly diversified American 
manufacturing base and the American working class.
    The announcement by the House leadership yesterday that the 
vote on Fast Track trade promotion authority will be postponed 
is only the latest sign that the kinds of trade agreements 
negotiated by presidents of both parties recently are deeply 
unpopular with the American people. Poll after poll over the 
past 6 or 7 years underscores the widespread view that these 
agreements have not lived up to their promises.
    Surely a principal reason is that these very trade 
agreements generally have been sold under false pretenses.
    Americans and their representatives have been told these 
are trade agreements. In fact, they are more accurately 
described as investment agreements and there is a big 
difference. This point, I think, is very important to 
underscore, that the purpose of our investigation here today is 
not to judge whether the U.S. economy as a whole is strong or 
weak, not to judge whether the U.S. economy as a whole is on a 
truly sound and solid basis or an unsustainable basis. The 
purpose of our investigation today is to figure out what role 
trade and globalization policies are playing in that American 
economy, and in particular, are they contributing to the 
strength of that economy or are they posing more problems than 
they are actually solving? So I hope we can keep our focus on 
the role that trade and globalization policies have actually 
played in recent years.
    These recent trade agreements have been sold consistently 
as agreements designed to boost U.S. net exports and therefore 
the net demand for U.S. products and workers and the value of 
those workers. But investment-oriented agreements get much more 
complicated, and when they are negotiated without addressing 
some of the major longstanding features of the world economy, 
these agreements inevitably have the net effect of draining the 
United States of productive capacity.
    These features include all manner of foreign government 
policies to channel investment into their own economic systems, 
regardless of market forces, as well as the formal and informal 
trade barriers and pro-producer, anti-consumer oriented 
national economic strategies that they have adopted that 
completely warp international trade flows.
    Many of the investment-oriented trade agreements negotiated 
recently have had a more sophisticated rationale to be sure. 
They were designed to improve American global competitiveness 
by farming out relatively unsophisticated manufacturing work 
abroad to countries like Mexico, freeing up U.S. workers 
ostensibly to do the higher value work and enabling U.S. 
companies to dramatically cut costs.
    We need to keep in mind that competitiveness entails not 
only better American corporate performance, but rising living 
standards for the vast majority of the American work force.
    The unprecedented deficits that the United States has piled 
up in recent decades and the fall in real wages experienced by 
most Americans for the same 30-year period--and we have to 
remember these trade policies did not start with NAFTA. This is 
a longstanding problem. These results show that on an economy-
wide net basis even this more sophisticated strategy has 
failed.
    The principal evidence for the investment orientation of 
U.S. trade agreements falls into two major categories. First, 
look at the major objects of U.S. trade policy, especially 
since the mid- or late--well, since the early 1990s:
    Mexico, China, Vietnam, sub-Saharan Africa, the Caribbean 
Basin region, Latin America, Jordan--all countries and regions 
with almost no sustainable consumer purchasing power whatever, 
and all determined and often forced to grow by becoming net 
exporters.
    No U.S. trade policy determined to increase U.S. net 
exports could possibly focus on countries like these. To turn 
Willy Sutton's famous comment on its head, in U.S. trade policy 
``we are going where the money ain't.''
    Second, as is the case globally, U.S. investment flows 
abroad have been growing much faster than U.S. exports and our 
trade deficits make clear how much of this investment has gone 
into building up export bases overseas, especially in emerging 
market countries like Mexico and also China. In fact, the study 
that I put out last year, which I have right here, makes quite 
clear that when U.S. multinational companies discuss their 
business plans regarding China, they ignore exports almost 
completely and emphasize investing and manufacturing in China 
instead. Exports are almost off the screen for most of the 
large U.S. companies engaged economically there.
    Now, U.S. trade policy has stealthily taken on an 
investment orientation, but U.S. Government projections of the 
economic impact of trade agreements have generally ignored this 
very important trend. Consequently, they have broadly missed 
the mark in their projections. Too often in trade negotiations, 
as a result, U.S. negotiators have been flying blind or they 
have not been telling the American people what they are really 
up to.
    I would like to supplement my written testimony with one 
brief final point. We desperately--and I underscore that, 
desperately--need more and better U.S. Government data on U.S. 
investment flows and their effect on U.S. trade flows.
    The Department of Commerce has given us a relatively good 
start, but its data fails to capture many of the increasingly 
important ways in which U.S. multinational companies have sent 
production abroad and other critical developments on the 
foreign investment front.
    By contrast, U.S. multinationals know exactly what they are 
doing in this regard. They know exactly how their sourcing 
patterns have changed over time. If they did not, they could 
not be successful. This is fundamental information for them. 
But for obvious reasons, they are not talking.
    I would be very happy to elaborate on this last point or 
answer any other questions that you may have, and thank you 
very much again for the opportunity.
    [The prepared statement of Mr. Tonelson follows:]
         Prepared Statement of Alan Tonelson, Research Fellow, 
   United States Business and Industry Council Educational Foundation
    Good morning. My name is Alan Tonelson. I am a Research Fellow at 
the United States Business and Industry Council Educational Foundation. 
I am honored by the opportunity to appear before you today, as is my 
organization.
    The Foundation is the research arm of the U.S. Business and 
Industry Council, a very distinctive national business organization, at 
least when it comes to trade and globalization issues. Our companies 
are predominantly small and medium-sized manufacturers. They believe 
that the strongest and broadest possible American industrial base 
employing large and growing numbers of our countrymen is essential for 
national security, for sustainable prosperity, and for our nation's 
political and social health. These views explain much of our opposition 
to the trade liberalization strategies pursued by the United States in 
recent decades.
    In fact, many of the problems created by these policies are 
conveniently summarized by the premise of these hearings--that most 
recent U.S. trade agreements are more accurately described as 
investment agreements. Unfortunately, in our view, the investments 
generated by these agreements have had the unavoidable impact of 
displacing many more high paying U.S. jobs, particularly in 
manufacturing, than they have created.
    Unless policymakers and citizens understand the differences between 
these investment agreements and conventional trade liberalization 
agreements, they will never be able understand the true impact on the 
U.S. economy of the current version of globalization, much less change 
course if they feel the need.

            I. TRADE AND INVESTMENT AGREEMENTS ARE DIFFERENT

    The flurry of U.S. trade agreements negotiated during the 1990s has 
generally been presented to Congress and the public as net creators of 
American jobs and growth, and boosters of wages for American workers. 
The key supposedly was their capacity to increase exports. The stated 
logic behind these agreements was compelling. The United States was the 
world's most open market, and its producers were denied crucial export 
opportunities by foreign trade barriers. Therefore, any trade agreement 
that reduced these barriers bilaterally or regionally or globally would 
bring the greatest benefits to American producers, since most of the 
market-opening would need to take place abroad.
    American leaders further explained that more exports would increase 
the demand for American products, and thus for American workers. In the 
process, this increased trade would raise the output of the former and 
the value of the latter. In addition, recent administrations have 
contended that export jobs pay considerably better than other 
comparable jobs, which made increasing exports that much more 
important.
    The rationale for investment agreements inevitably is quite 
different. If mainstream economic and trade theory are any guide, 
lowering worldwide barriers to investment makes no sense if economic 
policy is determined to secure disproportionate benefits for Americans. 
Liberalization of capital flows means that investors are free to roam 
the world in search of the highest returns, and to change direction as 
soon as business conditions change. The prime goal is maximizing global 
efficiency and growth, which clearly should benefit the United States 
in most instances, but which may well benefit other countries more. The 
distribution of gains depends heavily on the world economy's main 
features and on how investors expect those features to evolve. These 
characteristics of the world economy, it must be noted, inevitably 
include the wide variety of interventionist foreign government policies 
aimed at gaining technology and wealth, and promoting job creation. In 
short, there would be no guarantees for U.S. domestic producers--
workers and companies alike--from the results of indiscriminate 
investment liberalization.
    To their credit, the last two administrations have made efforts to 
take these complexities into account, and they produced a more 
sophisticated, more explicitly self-interested justification for the 
investment features of trade agreements that were becoming increasingly 
prominent and obvious. Agreements such as NAFTA, they argued, would 
indeed shift some U.S. production abroad. The net effect, however, 
would still benefit American companies and workers alike. For the work 
moved overseas would be relatively unsophisticated and labor-
intensive--the low end of ever more complex manufacturing processes 
that are more economically performed by low-income workers in low-
income countries. Not only would the total cost of U.S.-brand products 
be reduced, resulting in a gain for their global competitiveness. But 
U.S. workers would be freed up to concentrate on the more lucrative, 
more capital-intensive phases of manufacturing, which would make better 
use of their higher skill and education levels.
    These arguments were especially compelling in the early 1990s, when 
U.S. companies and their workers were operating at distinct 
disadvantages vis-a-vis their European and Japanese competitors in 
particular. The latter typically exported from protected home markets. 
As any sports fan knows, winning is always easier when you only need to 
play offense. Because the U.S. market was so open, however, U.S. firms 
had to play defense as well. Facilitating the transfer of low-end U.S. 
manufacturing to low-income countries theoretically could help American 
business overcome these inequities.
    Recent administrations have also taken note of changes in 
manufacturing techniques and markets that seem to argue for encouraging 
investment abroad. The emergence of truly global markets for many 
products means that one-size-fits-all production often will no longer 
do. Customization to fit local tastes is often necessary, and 
manufacturing close to or in local markets can help companies keep up 
with or ahead of local preferences, and better serve those customers. 
Dispersed international manufacturing can also help companies cope 
better with the problems created by fluctuating exchange rates. And 
finally, since the global distribution of worker and management skills 
is rarely uniform, some countries and workforces are simply better at 
developing or making certain products than are others. Washington quite 
rightly has felt that U.S. business should be free to take advantage of 
foreign talent and technology.

                II. WHEN THEORY FALLS SHORT OF PRACTICE

    Unfortunately, the shift from conventional export-oriented trade 
agreements to investment-oriented agreements has produced at least two 
major problems. First, this shift was never adequately explained to 
Congress or the public. In fact, throughout the 1990s, trade agreements 
were touted overwhelmingly for their export-creating potential. Second, 
the spread of U.S.-owned manufacturing abroad has not lived up to its 
promises in terms of promoting net exports and therefore domestic job 
creation and wages increases, much less economic growth.
    Indeed, quite the opposite seems to have occurred. Despite its 
beneficial potential for the U.S. economy in theory, in practice, the 
U.S. manufacturing investment that has been channeled abroad by recent 
trade agreements has almost certainly strengthened foreign 
manufacturing capabilities at the expense of domestic. In the case of 
developing countries, this investment has fostered export bases that 
have served mainly the existing U.S. market, not new foreign customers. 
Yet even when such offshore production serves local or third country 
markets, it often displaces U.S. exports, as does much offshore U.S.-
owned production in the developed world.
    As many supporters of current trade policies observe, the 1990s 
have seen an enormous flow of direct investment into the United States 
as well--a development that would seem to obviate concerns that America 
might be faced with an ``investment gap.'' Three points need to be made 
in response. First, the overwhelming share of such direct investment 
consists of merger and acquisition activities--i.e., foreign takeovers 
of existing U.S. facilities. Some of this investment undoubtedly saves 
U.S. factories and other facilities that would have gone out of 
business, but it is highly improbable that most foreign direct 
investment into the country represents a hunt for distressed assets--as 
opposed to highly attractive and profitable enterprises. Therefore, 
such investment is not in any meaningful way adding to America's 
productive capabilities. Ownership is simply changing hands. Second, 
there is no reason to think that the new investment-oriented trade 
treaties--as opposed to the underlying strength of the U.S. economy 
itself--were significantly responsible for the new investment flows. 
Finally, supporters of these trade agreements never claimed that new 
flows into the United States would result from these policies.
    In addition, the foreign manufacturing activities of U.S. 
corporations have hardly been restricted to labor-intensive, low-
technology products. Low-income countries like Mexico and China have 
become major sources of high-tech products for the United States. 
Indeed, emerging markets run large and growing surpluses with the 
United States in many high-tech industries.
    The results have been import levels that have swamped exports; U.S. 
trade deficits that are not only widening rapidly, but increasingly 
concentrated in high-value industries; lost market share for domestic 
producers; and downward wage pressure on U.S. workers even in advanced 
industries. Undoubtedly, some individual domestic production sites and 
workers have gained. But the trade deficits clearly show that, when all 
the complex economic effects of multinational production chains and 
their attendant trade flows are netted out, the domestic economy as a 
whole is a big loser.
    At the same time, many U.S. multinational companies have clearly 
benefited, often maintaining or increasing domestic or global market 
share, cutting costs, and widening margins. But these benefits do not 
necessarily accrue to the U.S. production base. That is to say, what 
has been good for General Motors and others is no longer automatically 
good for the United States. Indeed, there is precious little evidence 
that investment-oriented trade agreements have enhanced American 
competitiveness, if we accept the Packard Commission's definition of 
this term--the ability to produce goods that succeed in global markets 
while boosting the living standards of the American workforce.

                III. EVIDENCE FOR INVESTMENT ORIENTATION

    Two of the clearest signs that investment considerations have 
dominated recent U.S. trade policy are this policy's tight focus on 
low-income countries, where only the most modest traditional export 
markets can be presumed to exist; and the gulf that has opened between 
U.S. outward-bound investment and U.S. export flows.

A. Targeting the Third World
    Perhaps the most striking characteristic of U.S. trade policy 
during the 1990s has been its preoccupation with the developing world. 
Save for the Uruguay Round negotiations that led to the creation of the 
World Trade Organization, and weak, sporadic efforts to open Japanese 
markets in specific product areas, recent U.S. trade policy has been a 
Third World trade policy. Its major initiatives have consisted of 
extending NAFTA to Mexico and Latin America, normalizing trade with 
China, and liberalizing trade with the Caribbean Basin region, sub-
Saharan Africa, and Vietnam. Further, the Bush administration would 
like the next round of global trade talks to emphasize Third World 
needs.
    Even the Uruguay Round accords, moreover, are notable for their 
investment-related provisions and implications. In particular, by 
weakening U.S. trade laws, the agreement created powerful incentives 
for U.S. companies to serve the U.S. market from abroad. For the 
prospect of the United States responding effectively to predatory 
foreign trade practices and restricting access to its markets under any 
circumstances has been greatly reduced.
    The presumed logic behind the Third World focus is expressed in the 
oft-made observation that 96 percent of the world's population lives 
outside America's borders, and that most of this population is found in 
developing countries. Thus Americans, who comprise only 4 percent of 
humanity, cannot possibly remain prosperous without selling to these 
countries' consumers. As is just as often observed, many major Third 
World countries are undergoing transitions from highly interventionist 
and even outright communist economies to more liberal systems, which 
allegedly promises to liberate enormous tides of productivity and 
generate vast amounts of wealth.
    Yet this reasoning ignores the main features of Third World 
populations and workforces--the almost unimaginably low bases they 
start from, and the demographic forces likely to keep wages, and 
therefore sustainable purchasing power, near rock bottom.
    Developing countries may represent a large and rapidly growing 
share of the world's population, but they represent a much smaller 
share of world wealth. America's relatively puny population, for 
example, all by itself generates some one-third of global output. The 
European Union and Japan account for big chunks of the rest. Yet U.S. 
trade policy has backed off from efforts to open Japanese markets, and 
has conspicuously neglected this mission regarding Europe. Moreover, 
the huge projected growth of Third World populations is likely to keep 
wages in these countries abysmally low for the foreseeable future. This 
population explosion has, in fact, created a worldwide worker glut, 
which shows up most dramatically in the towering rates of unemployment 
recorded in Asia, Africa, and Latin America. In pre-crisis Indonesia, 
for example, the U.S. Embassy in Jakarta pegged the real un- and 
underemployment rate at 40 percent. In China, economists feel 
comfortable openly telling Western reporters that urban jobless rates 
are nearing 20 percent.
    Nor should these figures be surprising. When the supply of any 
product or economic input outstrips demand, the price will fall, all 
else being equal. And indeed, additional proof of a buyers' market in 
Third World labor comes from wage figures in these countries. From 
China to Indonesia to Mexico, inflation-adjusted wages in most of the 
developing world were falling for much of the 1990s. And where they 
were rising, e.g., in Korea, they helped created enormous and nearly 
fatal competitive disadvantages, as demonstrated by the financial 
crisis that engulfed so many of these countries starting in 1997.
    From the standpoint of promoting U.S. exports, the absurd extreme 
of U.S. trade policy came in the late 1990s, when the Clinton 
administration began pushing hard for trade liberalization agreements 
with sub-Saharan Africa, the Caribbean Basin countries, and Vietnam. 
Yet when President Clinton began touting the need for a sub-Saharan 
Africa deal, only four of the region's 35 potentially eligible 
countries had per capita incomes of greater than $800. Fifteen had per 
capita incomes of less than $300.
    Former U.S. Trade Representative Charlene Barshefsky depicted 
Vietnam in 1999 as a country with ``the potential to develop into a 
rapidly growing economy with significant demand for our products.'' 
What she did not mention was that, when she made this claim, Vietnam 
had only enough hard currency in its treasury to pay for 9 weeks of 
imports from anywhere.
    The picture has been just as mysterious for larger, ostensibly more 
promising economies like Mexico and China. During his landmark debate 
with Ross Perot over NAFTA in 1993, Vice President Gore gushed over the 
Mexican consumers' allegedly voracious hunger for American-made 
products. But at the time, Mexico's economy was only 3 percent as large 
as the U.S. economy. In addition, although Mexico's economy crashed in 
1994, right after NAFTA's ratification, U.S. exports to Mexico remained 
relatively robust. How could this be given the sharp drop in the peso's 
value, and therefore in the purchasing power of the typical Mexican?
    China has been touted as a huge export market for American 
producers as well. But its booming economy of the 1990s never accounted 
for more than 2.1 percent of U.S. goods exports during the decade.

B. The Widening Export-Investment Gap
    Mystery markets, however, are far from the only evidence for the 
heightened prominence of investment considerations in U.S. trade 
policy. Also pointing to this orientation is the widening gap between 
U.S. exports and U.S. outward-bound direct investment.
    As made clear by research published by the U.N. Conference on Trade 
and Development, this growing gap is a global phenomenon. The output of 
corporate international production networks and the sales of the 
foreign affiliates of multinational companies have been growing much 
faster than exports for the past two decades, and are now nearly twice 
as high.
    The United States has been no exception to this rule. From 1994 to 
2000, for example, U.S. goods exports increased 52.3 percent, and U.S. 
manufactured exports increased 56.1 percent. Yet the value of U.S. 
direct investment abroad for all industries (measured on an historic 
cost basis) more than doubled during this period. The comparable figure 
for manufacturing industries rose just over 71 percent.
    For specific countries, the trends are even more striking, and lend 
considerable support to the argument that U.S. foreign investment is 
more strongly associated with net increases of U.S. imports than with 
net increases of U.S. exports--and with larger, not smaller, U.S. trade 
deficits. China--America's most difficult trade policy partner--is the 
most striking example.
    From 1994 to 2000, U.S. total goods exports to China rose by 74.9 
percent, and manufactured exports rose by 71.7 percent. But the value 
of total U.S. total direct investment in China surged nearly 275 
percent during this period, and the value of manufacturing investment 
shot up by more than 466 percent. Not surprisingly, U.S. total goods 
imports and manufactures from China over these years each rose by 158 
percent--more than twice as fast as U.S. export growth.
    The supremacy of investment considerations in U.S.-China trade can 
also be gleaned from what U.S. multinationals themselves say about 
their economic dealings with China and their priorities vis-a-vis the 
People's Republic. A study of the websites of more than forty leading 
U.S. multinational companies I published last spring revealed that most 
of the major U.S. firms engaged economically with China are thinking 
primarily of investing and producing in China, not exporting from the 
United States to China.
    Some of these companies have even publicly stated their intention 
to help China replace imports (from anywhere in the world, including 
the United States), with domestic production. Kodak, for example, 
reports that its manufacturing operations in China support Beijing's 
determination to ``create professional enterprises which could displace 
imports and boost tax revenues.'' According to Westinghouse: ``By using 
Westinghouse technology and domestic manufacturing sites, China will 
greatly reduce its need to import power-generating equipment.'' 
Similarly, companies like Compaq, Motorola, and Procter & Gamble are 
all on record pledging to raise the Chinese content of their products.
    In fact, in September, 1999, Kodak's chief of China operations made 
crystal clear how the company views the roles played by exports from 
the United States and investments in China: ``We believe that viewing 
emerging markets only as export opportunities is the wrong strategy. In 
a market such as China, where the value of business is expected to grow 
rapidly, local manufacturing is simply a better business model.'' Just 
3 months earlier, testifying to the House Ways and Means Committee on 
China's WTO application, Kodak CEO George Fisher contended that ``Kodak 
factories in China will be important customers for Kodak exports made 
in the United States.''

            IV. WHY THE INVESTMENT-TRADE DISTINCTION MATTERS

    The importance of properly distinguishing between export-oriented 
and investment-oriented trade agreements is best revealed by the U.S. 
Government's recent failures accurately to project the economic impacts 
of the trade agreements it has sought.
    As previously discussed, NAFTA was sold primarily to Congress and 
the public as an export booster. Not only did Presidents Bush and 
Clinton and their top aides speak in these terms, but during the Bush 
administration, two government studies reenforced this case. The first 
was undertaken by the U.S. International Trade Commission. The second 
was conducted for the Labor Department by University of Maryland 
economist Clopper Almon.
    These studies dutifully examined the likely impact on U.S. trade 
flows and balances of reducing Mexico's tariff barriers and even its 
non-tariff barriers. Both predicted modest gains for the United States 
on these grounds. Yet neither study examined the likely impact of the 
changed North American and global investment flows that NAFTA would 
surely bring--even though Mexico supported NAFTA expressly to lure 
desperately needed foreign investment. As a Congressional Research 
Service specialist warned diplomatically in 1991, trade studies that 
ignore investment effects are of limited utility.
    The Bush administration promised extraordinary gains from a Uruguay 
Round agreement as well. It studied the likely economic impact even 
less extensively than its scrutinized NAFTA, but the results and 
problems were similar. In fact, most of the administration's economic 
case for the Uruguay Round rested on a report prepared by Australia's 
Centre for International Economics, whose only mention of investment 
was the completely unrealistic assumption that a new trade agreement 
would be accompanied by an instantaneous rationalization of the world's 
labor and capital assets.
    And despite the enormous impact on investment flows almost 
universally expected from China's entry into the World Trade 
Organization, the USITC's August, 1999 investigation of this 
development's ``economic effects on the United States'' lacked any 
comprehensive discussion of investment issues. And almost completely 
ignored was the relationship between investment flows and export flows.

                             V. CONCLUSION

    It is possible, though doubtful, that voters and legislators want 
American Presidents to negotiate trade agreements that ignore one of 
the most important features of the world economy--rapidly rising flows 
of foreign direct investment. As a result, it is possible, though 
doubtful, that voters and legislators want American Presidents to 
negotiate trade agreements bound to send more of our production abroad 
than they generate at home. And it is possible, though doubtful, that 
voters and legislators want American Presidents to negotiate trade 
agreements that add significantly to our trade deficits and therefore 
undermine our nation's financial future.
    But whatever our views of the recent successes or failures of U.S. 
trade policy, I hope we can all agree that voters and legislators at 
the least should be told explicitly that such decisions are being made. 
There can be no excuses for hiding the truth.

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

STATEMENT OF WILLIAM REINSCH, PRESIDENT, NATIONAL FOREIGN TRADE 
 COUNCIL, ON BEHALF OF THE NATIONAL FOREIGN TRADE COUNCIL AND 
         THE ORGANIZATION FOR INTERNATIONAL INVESTMENT

    Mr. Reinsch. Thank you very much, Mr. Chairman. It is a 
pleasure to be back. I appreciate the opportunity to present 
the views of the National Foreign Trade Council, as well as the 
Organization for International Investment.
    The growing importance of international investment is a 
natural consequence of the globalization that has been the 
hallmark of the world economy for the past two decades.
    Simply put, no business any longer has the luxury of 
limiting its view to its own back yard. Today's business 
environment, with its technological advances, multiple market 
possibilities, industry alliances, and greater consumer 
sophistication, demands that all companies compete through 
investment-led strategies.
    Some critics charge that the investment flows encouraged by 
the rules-based system amount to nothing more than the 
exportation of American jobs, and it is by now an article of 
faith in the anti-globalization movement that investment flows 
are inexorably drawn to low wage countries with lower 
protections for labor, the environment, or human rights.
    However, if that were true, one would expect the least 
developed countries to have been the recipients of massive 
investments in the last decade. The facts do not support that 
rhetoric, however.
    The United States, which receives more than 30 percent of 
worldwide investment, has been almost certainly the greatest 
beneficiary of the explosion in international investment during 
the past decade. Let me present a couple of facts taken from my 
written statement.
    U.S. affiliates of multinational companies sent nearly $900 
billion into the U.S. economy in the 1990s. U.S. subsidiaries 
of foreign companies employ 5.6 million Americans and pay 
average annual salaries of over $46,000, well above the average 
salary for U.S. workers as a whole. For the past 5 years, U.S. 
subsidiaries of multinational companies have paid record levels 
of Federal taxes. In 1997, a record $19.7 billion was paid, a 
28 percent increase over the previous year. U.S. subs of 
foreign companies exported a record $150.8 billion worth of 
merchandise in 1998, representing 22 percent of all goods 
exported by the United States.
    Mr. Chairman, my written statement has a lengthy section on 
the value of and advantages of inward investment using the 
State of South Carolina as an example and citing much of your 
work when you were Governor. In the interest of time, I am 
going to skip that part, but you are welcome to read it when 
you have the opportunity.
    In addition, though, looking at another angle, the 
geographic destination of U.S. foreign investment has not 
changed over a long period of time. Europe continued to account 
for nearly 55 percent of the total U.S. foreign direct 
investment during the last 10 years. Within the Asia Pacific 
region, U.S. firms did not favor China, the second largest 
market in the region, but rather Australia, which is a smaller 
market than many U.S. States.
    Today more than 75 percent of all foreign direct investment 
is in the developed world. In fact, investment has raced to the 
top, flowing in overwhelming proportion to stable democracies 
that are characterized by high living standards, well developed 
regulatory regimes, and transparent legal systems.
    U.S. outbound investment also promotes U.S. export 
industries. Increased levels of foreign investment and foreign 
sales are magnets for U.S. exports. According to the survey of 
current business, exports by U.S. multinationals were $438 
billion in 1998, an amount equal to some two-thirds of all U.S. 
exports. More than 40 percent of exports were to majority-owned 
affiliates of those U.S. companies.
    We believe rules-based trade agreements contributing to 
international investment flows lead to increased exports of 
goods and services and make a substantial contribution to the 
economic well-being of our country as a whole. There are many 
examples of high quality, high paying American jobs that are 
directly tied to the expansion of U.S. trade and investments.
    One is GE Power Systems, a $15.2 billion global business 
headquartered in Atlanta. GE recently announced that 
construction is underway at the Baglin Bay power station in 
South Wales, which will supply electricity and steam to 
industrial and commercial facilities there.
    The cornerstone of that system is a 50-hertz gas turbine 
which was shipped from GE's South Carolina plant last December. 
That plant employs approximately 2,900 people. But the story 
does not end with the gas turbine, which is the highest 
technology component in this project. Other components key to 
making the plant work, for example, include a gas generator 
supplied by GE's plant in Florence, Italy.
    In other words, interdependence is a business norm in the 
global marketplace. It is no longer rare to find that jobs or 
economic welfare of a company in a small Midwest town is tied 
to successful operation of its foreign affiliate in Europe or 
in Asia. The good news has been and remains that these 
transnational economic relations are winning propositions for 
the people on both ends of the equation.
    This hearing asks whether trade agreements are really 
investment agreements. The real question, we believe, is 
whether trade agreements cause U.S. companies to invest abroad. 
The data suggests for us that the answer is no.
    However, if the Committee is concerned about artificial 
influences on U.S. companies' decisions to invest abroad, then 
I would suggest two other questions that you might want to 
consider in future hearings.
    One is do trade barriers force firms to invest abroad?
    Some companies have been forced to invest in manufacturing 
abroad in order to overcome government trade barriers on the 
raw materials they use or as a market entry strategy to 
surmount protectionist barriers to their finished products.
    This certainly applies to some foreign direct investments 
in places like China, Brazil, and India. How many U.S. 
companies could have supplied these markets from their U.S. 
operation?
    How many more jobs would be supported if we could lower the 
tariffs and non-tariff barriers that some nations have erected? 
Secretary Evans' written statement, Mr. Chairman, has an 
example taken from Brazil and the automobile industry that I 
think is illustrative of the point I just made.
    A second question is whether trade agreements that other 
countries are concluding are driving U.S. companies to invest 
abroad. My statement elaborates a little bit more on that point 
as well. We believe that location decisions that multinational 
companies make take into account the trade treatment of goods 
and services from each of their facilities, along with 
production costs and transportation expenses.
    U.S. Trade Representative Robert Zellick illustrated this 
very well at an NFTC lunch last week with the story of 
Caterpillar's motor graders. Their Illinois-made motor graders 
face nearly $15,000 in tariffs when they are exported to Chile. 
When Caterpillar manufactures the same item in Brazil for 
export to Chile, the tariff is $3,700, and when Caterpillar's 
competitors make them in Canada they can be exported to Chile 
free of tariffs, in other words zero duty, because of the 
Canada-Chile Free Trade Agreement.
    This is the kind of disparity in trade barriers that, among 
other things, encourages companies, American companies, to 
locate offshore and which I think distorts trade, and which 
trade agreements, including the ones that we have had under 
discussion today, are designed to deal with.
    In conclusion, Mr. Chairman, I believe trade agreements 
lower artificial government barriers to trade and thus allow 
companies to make manufacturing, location and production 
decisions under clearer economic conditions.
    Multinational companies' decisions in regard to their 
global supply chain are a complex calculation involving work 
force quality, transportation access and cost, proximity to key 
suppliers or customers, and the overall business climate in a 
location.
    Trade barriers do skew that calculation, often to the 
detriment of the United States. Trade agreements that lower 
those barriers will let U.S. manufacturers, like Caterpillar's 
motor grader plant in Illinois, compete on a level playing 
field both against other related manufacturing locations abroad 
and against those of their competitors.
    Thank you very much.
    [The prepared statement of Mr. Reinsch follows:]

  Prepared Statement of William Reinsch, President, National Foreign 
Trade Council, On Behalf of The National Foreign Trade Council and The 
               Organization for International Investment

    Mr. Chairman, thank you for the opportunity to present the views of 
the National Foreign Trade Council (NFTC) and the Organization for 
International Investment (OFII) on how trade and investment flows are 
intertwined and how international trade and investment agreements 
affect corporate decisions about their global supply and production 
chains.
    The member companies of both the organizations that I represent 
today, while different in the locations of their headquarters, are 
united in their support of the rules-based trading system. Most of the 
NFTC's members are U.S. based firms that trade and invest around the 
world. OFII's members are the U.S. subsidiaries of companies based 
abroad that are likewise active participants in the global trading 
system. While many of our members compete in a particular industry or 
sector, they broadly share a common view of the rules under which they 
compete: non-discrimination for foreign investors (national treatment), 
non-discrimination between goods imported and goods made domestically, 
multilateral agreement to limit the use of government subsidies, and 
protection of intellectual property. They support these rules in their 
home markets and seek them when trading abroad.
    The growing importance of international investment is a natural 
consequence of the globalization that has been the hallmark of the past 
two decades. Whether searching for opportunities or looking out for 
competitors, business no longer has the luxury of limiting its view to 
its own backyard. Today's business environment, with its technological 
advances, multiple market possibilities, industry alliances, and 
greater consumer sophistication, demands that all companies compete 
through investment-led strategies.
    Some critics charge that the investment flows encouraged by the 
rules-based system amount to nothing more than the exportation of 
American jobs. Others claim that under a liberalized trade regime, 
investment always flows downhill to the lowest wage-earning countries 
with minimal environmental protections, the so-called ``race to the 
bottom.'' In truth, the expansion of direct investment by both U.S. and 
non-U.S. companies has contributed substantially to the economic health 
of the United States, while helping to lift many other developed and 
developing countries to new heights of prosperity. We believe that 
international investment and trade, conducted under the rules-based 
trading system is a force for economic growth, democracy, stability and 
is of direct economic benefit for millions of individuals around the 
world.
    It is by now an article of faith in the anti-globalization movement 
that investment flows are inexorably drawn to low-wage countries with 
lower protections for labor, the environment, or human rights. However, 
if that were true, one would expect the least developed countries to 
have been the recipients of massive investments in the last decade, but 
the facts do not support the critics' rhetoric.

       THE UNITED STATES: LARGEST RECIPIENT OF FOREIGN INVESTMENT

    The United States has been almost certainly the greatest 
beneficiary of the explosion in international investment during the 
past decade. U.S. affiliates of multinational companies, which number 
more than 9,700 companies, infused nearly $900 billion into the U.S. 
economy in the 1990s, more than the amount invested over the previous 
four decades combined. Today, the United States receives more than 30 
percent of worldwide investment. According to the Commerce Department's 
Bureau of Economic Analysis, foreign investment in the United States 
was almost $317 billion last year. Once in the United States, U.S. 
subsidiaries continually reinvest a significant portion of their U.S. 
earnings back into their American operations. In 1999, they reinvested 
53 percent of their earnings, totaling a record $18.8 billion. They 
also make significant investments in research and development and in 
new plants and equipment, all of which provide business to other 
companies in the United States. In 1998, U.S. subsidiaries spent a new 
high of $25.2 billion on U.S. research and development activities 
conducted by American scientists and engineers and supported by U.S. 
suppliers and sub-contractors.
    In perhaps the best evidence of their impact, U.S. subsidiaries of 
foreign companies employ 5.6 million Americans and pay average annual 
salaries of over $46,000, well above the average salary for U.S. 
workers as a whole. They account for 13.5 percent of all U.S. 
manufacturing jobs. For the past 5 years, U.S. subsidiaries have paid 
record levels of Federal taxes. According to the most recent IRS 
statistics (1997), foreign companies paid a record $19.7 billion in 
Federal taxes, a 28 percent increase over the previous year.
    In addition, U.S. subsidiaries exported a record $150.8 billion of 
merchandise in 1998, representing 22 percent of all goods exported by 
the United States. In fact, U.S. subsidiaries have accounted for at 
least 20 percent of U.S. exported goods for all but one year since 
1980. America's low trade barriers and open investment policies are 
significant reasons why these companies choose the United States as a 
location, not just to service our market, but as an export platform to 
other markets.
    Beyond the clear benefits of both the direct and indirect jobs 
provided by U.S. subsidiaries, there is a new set of stakeholders in 
the U.S. who also derive personal benefit from the operations of these 
companies here and abroad: shareholders. A recent study, commissioned 
by OFII and Citibank, tracked the 100 publicly traded foreign-based 
companies whose subsidiaries generated the most U.S. sales. The study 
found U.S. investors own 20 percent of the total shares of these 100 
companies. Among them, 62 have U.S. investors holding 10 percent of 
shares and U.S. ownership is as high as 30 percent or more for 22 of 
the companies. Nokia is a perfect example of one such foreign-based 
company with a major presence in the United States. It provides one of 
America's best selling cell phone brands, with over 5,500 U.S. 
employees in its Texas manufacturing operations. But the United States 
has another significant stake in the company: today, U.S. investors own 
55 percent of Nokia's stock.

           SOUTH CAROLINA: A FOREIGN INVESTMENT SUCCESS STORY

    The benefits that accrue to Americans from the domestic investments 
of foreign companies can be seen not simply in quantitative data and 
upwardly sloping economic statistics, but in the stories about real 
changes in the quality of people's lives.
    Mr. Chairman, we need not look further than your home State to 
witness how international investment has contributed to our economy. 
The story of foreign investment in South Carolina dates back to your 
tenure as Governor when you began to build the solid foundation of the 
excellent business climate the State enjoys today. As a result, in part 
of your creation of a statewide network of technical colleges that 
emphasizes job training and your commitment to fiscal responsibility, 
South Carolina enjoys one of the lowest unemployment rates in the 
country.
    The flood of blue chip international companies that have chosen 
South Carolina as a manufacturing location is remarkable if viewed 
historically. In the past, among the State's largest sources of 
employment were textile production and garment manufacturing. Fast-
forward to today and you see a remarkably different economic landscape. 
Textile manufacturers still provide significant employment, but are 
driven by the engine of their investment in high-tech automation. Down 
the street from the new textile mills, sit the manufacturing operations 
of companies from around the world. According to Department of Commerce 
figures, the State now has 116,900 jobs supported by U.S. subsidiaries, 
66,800 of which are in manufacturing, a 77 percent increase over 10 
years.
    One of the best examples of South Carolina's efforts to attract 
international companies is BMW Manufacturing's arrival in 1992. The 
luxury German carmaker, with a devotion to quality, was not looking for 
cheap labor or to get around a tariff wall. They were looking for a 
place to build a new type of car: the Z3. They wanted a location that 
would be a global center of excellence. The vehicles produced were not 
to be mere kits made in Germany to be slapped together in South 
Carolina, but top-of-the-line automobiles manufactured basically from 
the tires up in the State.
    BMW could have put this plant anywhere. It would have been easier 
to simply build it in Germany or elsewhere in Europe. If they were 
looking for cheap labor in the Americas or to surmount trade barriers, 
post-NAFTA Mexico would have been an obvious choice. But they did not. 
They chose South Carolina because of its educated workforce, the low 
cost of land and welcoming business environment. As part of their 
decision matrix, transportation was also central: getting components 
from around the country and the world in a timely fashion, while also 
exporting the finished cars to markets around the world, BMW needed 
good transportation options. The history of bringing BMW to South 
Carolina is now legend, but in this area, one of your efforts stand 
out: securing more than $45 million to facilitate BMW's needs at the 
Greenville-Spartanburg International Airport, thus helping attract the 
company to the State.
    At the end of the day, BMW's decision to locate in South Carolina 
delivered significant economic benefits. According to the company, BMW 
Manufacturing Corp. has made a total investment of $1.675 billion in 
the State, paid total compensation of $699.2 million and paid taxes and 
duties of over $190 million. Most significantly are the nearly 8,000 
people that are directly employed there where the average worker can 
earn salaries that top more than $56,000 a year. Additional jobs--
approximately 4,700--are attributed by BMW to the suppliers who have 
come to the State with a ``multiplier'' economic impact of $1 billion.
  u.s. investment abroad supports jobs at home and development abroad
    As much as companies abroad have invested at record levels in the 
United States, U.S. firms have kept apace in their overseas 
investments, investing $802 billion during the 1990s, more than they 
had in the prior four decades combined. But for all the talk of the 
``Asian tigers,'' new Eastern European markets, China's liberalizing 
economy, or India's economic reform, the geographic destination of U.S. 
foreign investment has not changed. Europe continued to account for 
nearly 55 percent of the total U.S. foreign direct investment during 
the last 10 years. Within North America, Canada received 8 percent of 
U.S. outbound investments, drawing $2 of U.S. investment for every $1 
invested in Mexico since 1994. Within the Asia-Pacific region, U.S. 
firms did not favor China, the second largest market in the region, but 
rather Australia, which is a smaller market than many U.S. states. 
Australia attracted 20 percent of the total U.S. investment in the 
Asia-Pacific region because of its educated workforce, legal 
protections, and technological capabilities. U.S. multinationals' 
investment strategies are much more motivated by access to affluent 
markets, skilled labor, and technological advantages than the 
possibility of reducing wages.
    Today, more than 75 percent of all foreign direct investment is in 
the developed world. As noted, the United States itself is host to more 
than 30 percent of all such investment. The United Kingdom runs a 
distant second with a little more than one-fourth the total of the 
United States or $82 billion as of 1999. China, by contrast, received 
only $40 billion in 1999, less than 5 percent of global flows. Thus, 
investment has, in fact, raced to the top, flowing in overwhelming 
proportion to stable democracies that are characterized by high living 
standards, well-developed regulatory regimes, and transparent legal 
systems.
    Statistics on wages similarly belie the anti-globalization 
rhetoric. In 1998, the average compensation paid to workers at 
majority-owned U.S. affiliates throughout the world was $33,100. In 
Canada and Europe, the average compensation at these subsidiaries 
topped $41,200. Investment simply has not ``raced'' to the lowest wage 
levels.
    Nor is it true, as critics often claim, that U.S. firms' foreign 
workforce is concentrated in developing countries with low wages and 
poor conditions. In fact, the vast majority of people employed by U.S. 
affiliates live in other wealthy, developed countries. In Europe, U.S. 
affiliates employed roughly 3.5 million workers in 1998--more than the 
combined U.S. workforce in Latin America and developing Asia. Almost a 
million Canadians are employed by U.S. subsidiaries--more than four 
times the number working in China.

                U.S. FOREIGN INVESTMENT PROMOTES EXPORTS

    U.S. outbound investment also promotes U.S. export industries. As 
of 1998, the assets of non-bank foreign affiliates of U.S. companies 
exceeded $4 trillion. In the same year, non-bank foreign affiliates of 
U.S. companies had over $2.4 trillion in sales in their domestic 
markets, nearly two-and-one-half times the amount of U.S. exports of 
goods and services. And these increased levels of foreign investment 
and foreign sales pull U.S. exports. According to the Survey of Current 
Business, exports by U.S. multinationals were $438 billion in 1998, an 
amount equal to some two-thirds of all U.S. exports. More than 40 
percent of exports were to the majority-owned affiliates of those U.S. 
companies. Thus, rules-based trade agreements contributing to 
international investment flows do not export jobs, but rather lead to 
increased exports of goods and services and make a substantial 
contribution to the economic well-being of our country as a whole.

           THE ECONOMIC RETURNS FROM U.S. FOREIGN INVESTMENT

    U.S. investment overseas reaps significant economic returns for 
Americans through higher employment levels in the United States, more 
sources of revenue, and improved productivity. There are countless 
examples of high-paying, quality American jobs that are directly tied 
to the expansion of U.S. trade and investment. Consider the example of 
GE Power Systems, a $15.2 billion global business with operations 
around the world and throughout the United States. GE Power Systems is 
headquartered in Atlanta, GA, but has major operations in Greenville, 
SC; Belfort, France; Houston, TX; Florence, Italy and Schenectady, NY 
to name just a few.
    GE recently announced that construction is well underway at the 
Baglan Bay Power Station in South Wales, site of the world's first GE H 
System. The 480-megawatt Baglan Bay Power Station will supply 
electricity and steam to industrial and commercial facilities within 
the new Baglan Energy Park, with excess power bid into the U.K. grid. 
The Energy Park is one of the largest single areas of industrial 
development in the U.K.
    The cornerstone of the GE H System is the 50-hertz MS9001H gas 
turbine, which was shipped from GE's Greenville, SC gas turbine 
manufacturing facility in December of 2000. The H System will produce 
480 MW of electricity, enough to power 168,000 homes. It will be fueled 
by natural gas. Gas powered turbines used for power generation are 
similar to jet aircraft engines, but on a larger scale.
    The GE Power Systems Greenville plant is the largest and most 
advanced heavy-duty gas turbine production facility in the world. At 
the facility, GE has the capacity to produce large gas turbines ranging 
in size from 40 to 480 MW used for generating electric power around the 
globe. The facility employs approximately 2,900 people and is the 
largest exporter of manufactured goods in South Carolina.
    But the story doesn't end with the highest technology component, 
the gas turbine from South Carolina. Other components are key to making 
the Baglan site work, for instance the plant will use a GE LM2500 gas 
generator supplied by GE Nuovo Pignone in Florence, Italy.
    Interdependence is a business norm in the global marketplace. It is 
no longer rare to find the jobs or economic welfare of a company in a 
small Midwest town tied to the successful operation of its foreign 
affiliate in Europe or Asia. But the good news has been and remains 
that these transnational economic relations are winning propositions 
for the people on both ends.
Conclusion
    This hearing asks whether trade agreements are really investment 
agreements. The real question is whether trade agreements cause U.S. 
companies to invest abroad. The data I have presented suggests the 
answer is: ``no.'' However, if the Committee is concerned about 
artificial influences on U.S. companies' decisions to invest abroad, 
then we might suggest two other questions for future Committee 
hearings:
    ``Do trade barriers force firms to invest abroad?'' Some companies 
have been forced to invest and manufacture abroad in order to overcome 
government trade barriers on the raw materials they use or as a market 
entry strategy to surmount protectionist barriers to their finished 
products. This certainly applies to some foreign direct investments in 
places like China, Brazil and India. How many U.S. companies, that 
desire to compete in every major market, could have supplied these 
markets from their U.S. operations? How many other international 
investors in the U.S., like BMW, would be able to use their U.S. 
operations as an export platform to South America if we had 
successfully completed the Free Trade Agreement for the Americas (FTAA) 
in the last Administration where the negotiations started? How many 
more jobs would be supported if we could lower the tariffs and non-
tariff barriers that some nations have erected?
    ``Are the trade agreements that other countries are concluding 
driving U.S. companies to invest abroad?'' The United States has been 
falling behind in negotiating trade agreements that lower barriers for 
U.S. goods and services. Today, the European Union has 27 free trade or 
special customs agreements around the world, 20 of which it negotiated 
in the 1990s; it is negotiating another 15 right now. Countries 
throughout East Asia are quickening the pace of special trade 
negotiations. Japan is negotiating a free trade agreement with 
Singapore, and is exploring free trade agreements with Canada, Mexico, 
Korea, and Chile. In our own hemisphere, there are 30 free trade 
agreements, and the United States is party to only one.
    We believe production location decisions for multinational 
companies take into account the trade treatment of the goods and 
services from each of their global locations along with production 
costs and transportation expenses.
    U.S. Trade Representative Robert Zoellick illustrated this very 
well at a lunch hosted by the NFTC last week. He told the story of 
Caterpillar and the motor graders they make in Illinois. Caterpillar's 
Illinois-made motor graders face nearly $15,000 in tariffs when 
exported to Chile. When Caterpillar manufactures them in Brazil for 
export to Chile, the tariff is just $3,700. And when Caterpillar's 
competitors make them in Canada, it can be exported to Chile free of 
tariffs because of the Canada-Chile free trade agreement.
    If we continue to miss out on the effort to lower trade barriers, 
we may find that U.S. based companies have little choice but to service 
some countries and whole regions from manufacturing sites outside the 
United States.
    Mr. Chairman, contrary to the premise of today's hearing, trade 
agreements lower artificial government barriers to trade and thus allow 
companies to make manufacturing location and production decisions under 
clearer economic conditions. Multinational companies' decisions in 
regard to their global supply chain are a complex calculation involving 
workforce quality, transportation access and cost, proximity to key 
suppliers or customers and the overall business climate in a location. 
Trade barriers skew the calculation, often to the detriment of the 
United States. Trade agreements that lower these barriers will allow 
U.S. manufacturers like BMW's South Carolina plant and Caterpillar's 
motor grader plant in Illinois to compete on a level playing field both 
against other related manufacturing locations abroad and those of their 
competitors.

    The Chairman. Thank you very much.
    Dr. Luttwak.

            STATEMENT OF EDWARD N. LUTTWAK, Ph.D., 
         CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    Dr. Luttwak. I want to thank the Senators on this 
Committee, because I am grateful for their continuing focus on 
this issue and for their continuing refusal to simply go along 
with the prevailing ideology. The last century was a great 
lesson in the power of ideology over man's minds. The ideology 
in question is the theory of comparative advantage.
    We all know that the theory of comparative advantage is a 
perfectly valid theory as it was enunciated by Ricardo, but 
there is also another theory and that is the theory of 
political comparative disadvantage. In other words, what ought 
to happen in the world of economic theory is that we all do 
what we are best at doing, remove all barriers and impediments, 
and, geography aside, we will have a world which will be 
altogether more productive. Everybody would be richer.
    What actually happens from time to time at any one moment 
in real life is that there is the phenomenon of what actually 
happens is not dictated by economic comparative advantage, it 
is dictated by it plus the interaction with political 
comparative disadvantage. In other words, groups that are 
politically weak are unable to do anything about it and they 
absorb whatever winds and tides and storms the world economy 
happens to hit them with, and groups that are politically 
strong, what they do is they garrison their sectors of the 
economy and they protect themselves.
    It is, in my view, a credit to Japan that, if you look at 
Japanese protectionism, which is a very real phenomenon, it is 
weak groups that are protected, it is marginal groups, the very 
groups that in our political system are completely ignored. It 
is craftsmen, traditional craftsmen, it is the small-scale 
farmer, the very people that in our system are ignored.
    I think that what the Japanese are saying to us is that for 
countries that are wealthy, that have a high GNP, there is 
something more important than increasing the total GNP by 
another tiny percentage point if this means that you are going 
to have a substantive move away from an egalitarian to a more 
extreme distribution of income, or if it means you are going to 
lose pieces of your society, like traditional craftsmen. As you 
know, the very last fight between the Chinese and the Japanese 
has to do with protecting the importation of the straw sandals, 
a very old craft.
    So, what I see the Senator and this Committee doing is 
intervening on the side of those who are comparatively 
disadvantaged in the normal political process. General Electric 
is not disadvantaged in the normal. General Electric is well 
represented in the political process, and I see the Senator and 
this Committee intervening on behalf of the industrial workers 
in less powerful industries and such like.
    The second observation arises from having heard the dialog 
between Secretary Evans and Senator Hollings.
    Senator Hollings starts off by saying: Look, we have a 
trade deficit which has become colossal, 4 percent of GNP, and 
this cannot be sustainable, and it is associated with all these 
phenomenon. Evans replies: Well, I go around the country, 
everybody is prosperous.
    Well, the reason is that there are actually two different 
time perspectives at work. The process of decline that 
transformed Holland, which was an industrial, shipbuilding 
industrial country and trading and so on, into first it was 
industrial, then it became financial, and then it became 
nothing. That process of decline was not accompanied by drastic 
impoverishment. At any one time there was a bubble surface of 
prosperity.
    In England, when I went to Great Britain in 1955, not only 
did the British have the highest GNP per capita in Europe, but 
also the distributed standard of living was such that the 
average Englishman lived much better than the average French, 
German, Italian. Well, today what happens is that the GNP per 
capita, of course, is much lower than it is in France or 
Germany. But, in fact, that depends upon the fluctuating pound 
to euro.
    But what has happened is that the actual standard of living 
of the distributed population of England has declined 
catastrophically, so much so that when Italian industrial 
workers in part of a joint trade, development, investment, 
acquisition, industrial workers visit industrial workers in the 
British Midlands, they are stepping into what, for Italians, is 
a Dickensian world of people who live miserably by their 
standard.
    In other words, the processes of long-term decline 
associated with de-industrialization are not visible at any one 
moment in time and it is only historically that--the Dutch woke 
up in the 19th Century having discovered that losing industry 
and gaining finance was not making it, even though the GNP 
would show very good results. The GNP does not measure what 
happens within economies.
    The final point I would like to make is that, in regard to 
the large book of non-compliances, I think that the very same 
substantive outlook you have brought to this process, Senator 
should be focused at this moment on the civilian aerospace 
industry. There we have a real problem between Boeing and 
Airbus, and this is not just the wily processes by which, for 
example, the French Ministry of Transport budget flows into a 
subsidy for the super-jumbo because, you know, they are going 
to straighten the Bourdeaux-Toulouse Road and provide some 
money for these vehicles, much more focused substantively.
    Perhaps what is fundamentally wrong is not unfairness on 
the part of Airbus subsidization, but the fact that Boeing is a 
monopoly. It is a sleep monopoly, or a stagnant monopoly, or a 
silly monopoly, or a mismanaged monopoly, but still, look at it 
substantively, the way Hamilton, who you so rightly quoted, 
told us to do. Hamilton said: I know, I understand the theory--
because, of course, the theory was around long before David 
Ricardo specified it; it was implicit in Adam Smith and it was 
implicit 100 years before Adam Smith in the Martyn merchants 
thing on the India trade.
    Hamilton said: ``I know the theory, the theory is great; 
the only thing is, I do not want in the United States the kind 
of prosperity associated with successful plantations. I want it 
to have a distributed prosperity of many factories and so on.''
    In that vein of substantiveness, I think we should really 
look at the aerospace industry and see what has happened to it 
and whether the remedies are international. Probably the 
remedies would have to be much broader than that. They may 
involve antitrust. I do not know. But we have to do something, 
because it is a very important industry and it is clearly going 
down the drain.
    Thank you.
    [The prepared statement of Dr. Luttwak follows:]

 Prepared Statement of Edward N. Luttwak, Ph.D., Center for Strategic 
                       and International Studies

 [Extract from re-draft of Turbo-Capitalism: Winners and Losers in the 
       Global Economy HarperCollins 1999, Harper Perennial, 2000]

                         Free Trade As Ideology

                         [By Edward N. Luttwak]

    The god of the market-worshippers is Adam Smith, a devotion that 
crucially depends on not reading him. Being far wiser than his modern 
worshippers, Smith filled his work with exceptions, exclusions and 
reservations to the rule that free markets allocate most efficiently, 
maximizing the common welfare. As for the specific worship of free 
foreign trade--a varitable religion for the American and British ruling 
elites--it is just as important not to read either Adam Smith or his 
worthy predecessor, Henry Martyn, merchant in the East India trade, a 
pithy writer, he was excessively clear-minded thinker from the 
viewpoint of today's true believers. Unlike them, Martyn recognized 
that wealth may point in one direction, welfare in another.
    Seventy-five years before Adam Smith published his Inquiry Into the 
Nature and Causes of the Wealth of Nations, seventy-seven years before 
Adam Smith became a commissioner of customs in Edinburgh through the 
influence of the Duke of Baccleuch, thereafter commending the bravely 
independent risk-taking of free enteprise and the superiority of 
unrestricted free trade while holding a secure government post charged 
with obstructing imports into Scotland, Henry Martyn's Considerations 
Upon the East India Trade of 1701, written to oppose the East India 
Company's monopoly, had already anticipated most of what is right and 
wrong about the theory of free trade:
    ``Things may be imported from India by fewer hands than as good 
would be made in England, so that to permit the consumption of Indian 
manufactures is to permit the loss of few men's labor . . . A law to 
restrain us to use only English manufactures, is to oblige us to make 
them first, is to oblige us to provide for our consumption by the labor 
of many, what might as well be done by the labor of few, is to oblige 
us to consume the labor of many when that of few might be sufficient.''
    Martyn captures the opportunity-cost essence of the free trade 
argument lucidly enough:
    ``If nine cannot produce above three bushels of wheat in England, 
if by equal labor they might procure nine bushels from another country, 
to employ these in agriculture at home, is to employ nine to do no more 
work than might be done as well by three.''
    That is what is right about free trade theory. Import barriers 
artificially preclude efficiency gains identical to those achieved by 
better technology, better organization or any other source of domestic 
productivity. That goods or services originate from a point on the 
surface on the planet that happens to be classified as foreign at a 
given time (subject to change by conquest or voluntary union), is an 
entirely meaningless attribute in purely economic terms. Until the late 
195Os, there were still tariff (Dazio) barriers within Italy, so that 
trade-foreigners were as near as the next town.
    Equally, all that is wrong about free trade is already evident in 
Martyn's pamphlet:
    ``If the same work is done by one, which was done before by three; 
if the other two are forced to sit still, the Kingdom got nothing 
before by the labor of the two, and therefore loses nothing by their 
sitting still.''
    In other words, what benefits the Kingdom, or the Gross National 
Product as we would now say, need not benefit all its subjects, and may 
indeed turn some into paupers. Of course the same is true of any other 
increase in efficiency, such as might ensue from the use of better 
software for example. But simply because any change in trade barriers 
is a matter of presumptively democratic political decisions, unlike 
changes in computer usage done by private firms or individuals for 
their private reasons with private funds, the employment implications 
cannot be overlooked.
    In poor countries, free trade can drastically alter the total 
economy given favorable circumstances including foreign investment, 
lifting much of the population to a much higher levels of income. In 
affluent countries, however, long on total national wealth, but now 
increasingly afflicted by the return of poverty in the most vulnerable 
fraction of their populations, it is not necessarily a good idea to 
enrich the Kingdom by replacing three with one, leaving the other two 
``sitting still''.
    Most economists would, of course, immediately point out that it is 
much better for all if the many gainers from any given market opening 
compensate the few losers, rather than to keep protectionist barriers 
that reduce the total incomes of all. They say that, sometimes offering 
a quick calculation--and then they leave the scene. That some workers 
may be protected by some trade barriers while compensation schemes are 
never implemented, is a political phenomenon outside the scope of the 
profession as now defined. For they who invoke the Master have 
abandoned his broad political economy for an abstract economics of 
``other things being equal'', and purely theoretical compensations for 
any adversities.
    In particular, most contemporary economists simply ignore the 
possibility that people might actually prefer to live in a country 
whose economy is somewhat less efficient than it could be, because of 
protectionism among other impediments. In fact, they implicitly assume 
that societies exist to serve the needs of their economies, instead of 
the other way round, thereby attributing no importance to the stability 
of employment (as opposed to earning levels), the upkeep of traditions 
(e.g. Japan's rice-farming culture), or the avoidance of gross 
increases in the inequality of incomes and wealth.
    True, many of those who attack the ruling orthodoxy go beyond 
societal welfare-versus-wealth arguments, intrude into purely economic 
analyses, and in so doing keep repeating the same elementary errors. 
They persistently and grossly over-estimate the importance of 
international trade and investment flows for the national economies of 
major countries, and most notably for the huge American economy. In 
this ``turbo-capitalism'' critique of mine, by contrast, globalization 
ranks as a distant fourth after privatization, de-regulation and 
technological change.
    Most commonly, the errant opponents of free trade keep confusing 
competition among goods with wage competition. It is each country's 
internal labor market that sets wages, so that, say, German workers 
whose employers are competing head-to-head with, say, Indian exports 
are not themselves competing with Indian workers, whose own wages are 
quite irrelevant to their own. Only the competition of other German 
workers matters--so that Indian exports can affect the wage rates of 
German workers indirectly, insofar as an unfavorable trade balance 
rather than any other reason causes unemployment reducing wages (in 
Germany's case only in theory, because German wages are kept downwardly 
rigid by trade-union power).
    Some opponents of free trade are so overcome by their eagerness to 
translate cold war animosities into ``geo-economic'' rivalries that 
they miscontrue them as national confrontations. Yet for each Boeing-
Airbus Industrie truly zero-sum market war over airframes there is a 
American GE-French SNECMA alliance of engine manufacturers. Because for 
each major country the strongest trading competitors are also routinely 
the largest export customers, geo-economic rivalries are destined to 
remain strictly confined to the specific industries involved, without 
descending into emotional national rivalries. And moreover, most 
amazingly, even supposedly trained economists tend to reveal an 
inability to understand the ancient and elementary theory of 
comparative advantage when arguing against free trade. The advantages 
in question are internally comparative, so that even if Lazo is less 
efficient than Worko in producing everything, its least-bad industries 
can still profitably export to Worko, whose own resources are best 
employed by its better industries, not the weakest industries with 
which Lazo is competing.
    But there is more to it than that. Most advocates of free trade do 
not merely oppose trade barriers, they are offended by them. For they 
know that only the free interplay of supply and demand, a.k.a, the 
invisible hand, can set market-clearing prices with neither waste nor 
contrived shortages, thereby signalling to all producers what is the 
most efficient use of their scarce resources at any one moment in time. 
And they are frustrated in their knowledge that if all trade barriers 
were removed, the planetary income and standard of living would swiftly 
and greatly increase, because every producer would be free to fully 
exploit its own particular comparative advantages, eliminating a 
planet's worth of inefficiencies large and small. Instead, every state 
in the world artificially segments the planetary market, by imposing 
its own obstacles to imports by way of prohibitions, quota limits or 
tariffs--and sometimes to exports as well, often by pretending that 
only processed and not raw materials be sold abroad. Each state thus 
distorts not only its own internal market, but by successive 
displacements of supply and demand, all markets, everywhere. By so 
doing, the entire world's efficiency in using scarce resources is 
diminished, leaving the planet much poorer than it need be.
    Because all competent academic economists know these things to be 
true, and because so little else in their inventory of theories remains 
unrefuted, most economists are greatly irritated by any and all 
arguments for trade barriers. In addition to proving them costly for 
the standard of living, they are eager to expose them as the spurious 
excuses of domestic producers, out to exploit the consumer by raising 
prices behind the shelter of import barriers.
    When it could still be argued that food self-sufficiency was a 
strategic necessity, most economists asked why the agricultural 
interest should be allowed to levy its own permanent tax on all 
consumers, given that a one-time accumulation of reserve stocks of 
imported food would be far cheaper.
    When it is argued that a particular industry could eventually 
become competitive if it can first grow to stength behind protective 
barriers, most economists assert that long-term lenders can finance the 
infancy of any industry far more efficiently than captive consumers. 
Nor would they ask for the indefinite continuation of enervatingly 
profitable import barriers, as protected industries always do.
    When it is pointed out that import barriers can preserve 
employment, most economists trot out the compensation counter-argument, 
as if that theoretical construct were a practical remedy.
    The emotional intensity of the free traders is particularly evident 
when they are confronted by important defectors from their own ranks. 
Richard Cobden lamented on his deathbed not his own imminent death, but 
rather John Stuart Mill's apostasy in formulating the infant-industry 
argument:
    ``I believe that the harm which Mill has done to the world by the 
passage in his book on Political Economy in which he favors the 
principle of protection in young communities has outweighed all the 
good which may have been caused by his other writings.''
    Alfred Marshall was no less mournful over the same defection:
    ``When John Stuart Mill ventured to tell the English people that 
some arguments for protection in new countries were scientifically 
valid, his friends spoke of it in anger--but more in sorrow than in 
anger--as his one sad departure from the sound principles of economic 
rectitude''.
    This is not so harsh as Cobden's condemnation, but equally replete 
with sentiment. It was just the same with Keynes. Originally he was the 
purest of the pure:
    ``We must hold to Free Trade, in its widest interpretation, as an 
inflexible dogma, to which no exception is admitted even in those rare 
cases where by infringing it we could in fact obtain a direct economic 
advantage.'' But Keynes too was to deviate from the path of economic 
rectitude. Reacting to Britain's very high unemployment rates after 
1930, knowing that the government would not devalue sterling and that 
the unions would not accept wage reductions, Keynes ``reluctantly'' 
proposed tariffs as the only remaining method of increasing employment, 
through import substitution. That utterly dismayed his earstwhile 
friends, colleagues and admirers, some of whom reacted with outright 
hostility. Lionel Robbins (my own teacher) spoke of Keynes's 
``extraordinary naivete''' in believing that import duties could easily 
be removed once they had served their purpose. At the time, millions 
were living on the dole, eating bread and jam for breakfast, lunch and 
dinner, but Keynes's opponents worried about the distortions that might 
linger in the aftermath, perhaps years later.
    After accepting in full every possible objection, including the 
marginality of all foreign trade and investment in very large 
economies, Keynes has the last word: one should do what one can, even 
at the expense of sacrificing abstract principle for mere flesh and 
blood.

    The Chairman. It is going down the drain, Dr. Luttwak. It 
is interesting you observe it, because we just had last week a 
lunch with Mr. Bernie Schwartz of Loral and he was talking 
about aerospace and space satellites. He was noting that the 
two largest European producers were merging together and, with 
subsidies, they were going to take over that market.
    Now, what you commented upon is just that. When you say the 
governmental political comparative disadvantage, you are 
exactly right. The comparative advantage is government and 
whatever the government policy is, and if the government policy 
is in Japan to take care of the weak, fine, it is working.
    In fact, if I was the emperor of Japan I would continue to 
work it the same way. It is working. They have not had all the 
bankruptcies. They have taken over a larger share of our 
automobile market. Their economy grows stronger and stronger. I 
know about all the lament in The Wall Street Journal and 
everything else like that, but you can talk to others that are 
there and the people have gone along. The workers are paid far 
more than our industrial salaries, and it is working.
    With respect to taking care of the weak, the weak are the 
textiles, the strong are the movies. Everybody is talking about 
intellectual, intellectual, we have got to sell Hollywood 
movies, but they do not talk about the workers in the textile 
plants.
    Right to the point, Mr. Reinsch, about these jobs, you cite 
all these wonderful things about South Carolina. Yes. I really 
have been carpetbagging Schenectady, New York, with GE to bring 
it down to Greenville, where we have got the 2900. I have said 
openly I would rather have that GE than have Microsoft, because 
my GE workers probably make around $24 an hour, way more than 
the average. Well, if you are in charge of software that is a 
different thing, but I mean the average worker.
    They had to go on strike out there to get retirement 
benefits in Seattle, at Microsoft.
    So my GE workers are well paid and that is the middle 
class. My BMW workers are well paid. My problem is I had five 
GEs, now I have only got two. They told the GE plant in Labson, 
South Carolina that also made turbines, the Brazilians said, 
``we are not going to buy it unless you move.''
    So they have gone to Brazil.
    The same with--I could go down the list of all the other 
plants. I looked at the fact the other day that we have had 
since NAFTA a net loss of 35,000 manufacturing jobs.
    True, we have got Hoffman-LaRoche, Hitachi, Fuji, BMW, and 
GE has expanded and everything of that kind. But where I had 
all those GEs, I am down to two. Where I used to have four 
Westinghouse, I am down to two. Where I used to have four 
Duponts, I am down to two.
    I have seen them come and then I have seen them go. I am 
watching this closely and I am having a net loss. There is no 
question--there is one thing I want in the record, because you 
helped produce it with the late Senator John Heinz with respect 
to Smoot-Hawley. I never have been able to get an official 
record around this place, but we need it before the Committee.
    It was just mentioned by a previous witness that the GNP--
the Secretary of Commerce--that 25 percent of our GNP was in 
world trade. At the time of Smoot-Hawley, only 1 percent, 
according to Mr. Reinsch of Senator Heinz's staff, and only 
one-third of the trade was affected by Smoot-Hawley. Two-thirds 
of the trade was not affected by Smoot-Hawley and it suffered 
just as much as the Smoot-Hawley-regulated trade.
    It was passed, incidentally, as you and I both know, some 8 
months after the stock market crash of October 29, 1929. It was 
not passed until June 1930, so it did not cause the crash.
    Only 2\1/2\ years later, with Cordell Hull, we got 
reciprocal free trade, which started rebuilding America.
    Reciprocal. Ah, they did not holler about just free trade; 
they said reciprocity.
    Do you wish to comment or elaborate or correct me in any 
way, because you are my authority now.
    Mr. Reinsch. Well, I am compelled, Mr. Chairman, to stand 
behind what I said then, and I said then and I will say again I 
think Smoot and Hawley got a bad rap as far as the Depression 
is concerned. I think there is no question about that.
    I think it is also fair to point out that the enactment of 
that law did not do much to bring us out of the Depression.
    It is probably fair to say that the Reciprocal Trade Act 
did not do much to bring us out of the Depression, either. What 
brought us out of the Depression was the war.
    The more relevant point is that that was then, this is now. 
The world is a very different place now than it was then. The 
volume of trade at that point was much smaller. It is 
interesting to observe that, as I recall, the real difference 
in trade volumes was impacted more than anything else by World 
War I and the aftermath of World War I. The volume of world 
trade did not reach 1913 levels again in real terms until about 
the late 1980s or late 1990s. It took us that long to recover 
in terms of total volume.
    Nevertheless, here we are and I think the important 
question, and you have raised it in your earlier remarks, is 
what kind of world are we in now and how do we deal with the 
changes that are occurring and which way do we go. In some 
respects we do not have as many choices as we used to. The 
economy is not as insular.
    I will tell you a story, if I may. I used to talk about 
trade by saying more than 60 percent of the cut flowers sold in 
this country every day are imported, which is true. It used to 
be 50; now it is 60. The important point about that fact is 
that 20, 30 years ago you could not do that, because we did not 
have a transportation structure that would allow that to occur. 
Now we do and people have taken advantage of it.
    I gave that speech once to the Eastern North Carolina 
Chamber of Commerce. I am not quite sure where they are 
located, but it is sort of east of I-95 there somewhere. Some 
guy came up to me afterwards and said: ``You know, that story, 
that is very interesting, but that is nothing; we have got a 
fish company off the coast of North Carolina that goes out and 
catches fresh flounder every day in the Atlantic and sells them 
in the Tokyo fish market daily.''
    Now, leave aside for the minute how they get it into the 
Tokyo fish market. I do not know. But the point is that 20 
years ago you could not do that either, because we did not have 
a transportation infrastructure that allowed you to ship fresh 
fish over that period of time. Now we do. Companies are taking 
advantage of that. Sometimes the advantage they take is a 
productive thing for the United States, sometimes it is not. 
But that is the reality we live in.
    I want to join with my colleagues--and I was remiss in 
commending you as one of the few people in the Congress that 
really wants to have a debate about this. I think it is 
important. We are not asking the right questions and you are 
asking the right questions. We may not all have the same 
answers, but you are to be commended.
    The Chairman. That is the whole purpose. Really, we could 
not accomplish what is really needed in one hearing.
    What we are trying to do is open it up. That is why we 
oppose Fast Track, because we need that debate to find out 
where we are and where we are headed.
    I can tell you, though, we have got what you call the 
Sargasso Sea right within 50 miles of my home, and we have been 
shipping those eels to Japan for 30 years, because they like 
fish, they like eels, and they love flounder and everything 
else of that kind.
    But I have also got West Virginia Pulp and Paper and they 
tried to sell cigarette paper, and they said: ``Oh no, we smoke 
a different kind of cigarette with a different paper.'' So they 
spent $2 million and they got with the best of development labs 
in the paper industry, and they have got them right there in 
Charleston. So they developed a paper, you could not tell the 
difference between what the Japanese had and they had, and they 
still, after spending $2 million, they could not sell the 
paper.
    They have always got these barriers. You are right, 
everybody raises these barriers around, and that is the 
description of the global economy. The global competition is 
controlled trade, it is not free.
    The Secretary--I did not want to sound like an upstart, but 
he said we want to lead in world trade. What we are doing is 
leading in world trade deficits. What kind of leadership is 
this? We are going out of business.
    Dr. Tonelson, we really need better data. I worked with 
Herman Stabman and now going through four Secretaries of 
Commerce, and I know in the 1979 figure given us by the 
Department that 41 percent of what we consumed in America was 
imported. The majority now, I am convinced, is imported. There 
is not any question in my mind.
    Yet I cannot get that figure. I have talked to Secretary 
Evans about it. He is going to try to start getting us better 
records. We need better data, because, like you say, they do 
not want to give the figures out about the jobs. They are not 
creating jobs at all. They are going, and you can understand 
it.
    If you can save 10 percent of volume with respect to moving 
to an offshore low-wage country, if you have got $500 million 
in sales, it is actually a 20 percent saving. If you have got 
$500 million in sales, doctor--well, I think it was James 
Goldsmith who appeared before this Committee several years 
back, a very successful businessman. He says you can keep your 
executive office, your sales office in-country, but move your 
manufacturing offshore. $500 million in sales, you can make 
before taxes $100 million, or you can continue--and that is the 
job policy of the Congress--you can continue to work your own 
people and go out of business because your competition has 
gone. They are moving.
    We are losing. The net loss, like I say, in my little State 
since NAFTA is 35,000 manufacturing jobs. We heard Senator 
Allen, actually he has had, since NAFTA, a 25 percent loss of 
manufacturing jobs in the State of Virginia.
    So what we have got to do is get this debate and get it out 
into the open and realize the direction. Adlai Stevenson said: 
``It is not a question of whether I am conservative or I am 
liberal; am I headed in the right direction.''
    The direction we are headed, Dr. Luttwak, you are right 
about the Brits. They told them after World War II: ``Do not 
worry; instead of a nation of brawn, we are going to be a 
nation of brains; instead of producing products, we will 
provide services; instead of creating wealth, we will handle it 
and be a financial center.'' And they have gone to hell in an 
economic handbasket over there.
    They have got two levels of society. They have got nothing 
but the debating parliamentarians and scandal sheets, and that 
is the way we are headed. We have this big debate going on 
hollering ``the economy is good, surpluses,'' when there is not 
any surplus. I have got it in my pocket. I get it every 
morning. Let us see. We are now in the red this fiscal year, 
the year 2001, $59 billion. We ended up last year with $23.2 
billion in the red, deficit.
    We have had a deficit since Lyndon Johnson. I voted for the 
balanced budget then of $3.2 billion, and that was not because 
we went to the unified budget, or whatever, that used Social 
Security funds.
    But we do not have surpluses and yet we talk about 
surpluses. The Secretary says the economy is good when it is 
going down into the pits, and not to be concerned about this 
trade deficit in excess of $400 billion is very, very 
bothersome, because we are going to run into a wall here before 
long. We will not be able to sustain as a world power.
    I believe Morita was right in that sense, that you have got 
to be able to produce, develop a strong middle class. That is 
the strength of a democracy.
    I have got a long list here, but we have got another thing 
coming up, and you folks have waited and been very patient. Let 
me keep the record open, if you do not mind, for questions.
    Any further comments from any of the three? We would be 
delighted to have it. We will keep the record open for the 
other Senators, because I have been noticed they want to submit 
some questions to each of you. And we will have you back. Thank 
you very, very much for your appearance here today. The hearing 
will be in recess subject to the call of the chair.
    [Whereupon, at 12:06 p.m., the hearing was adjourned.]


                            A P P E N D I X

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

                   ``A North American Common Market''

    The foundation of American foreign policy has been our steadfast 
commitment to freedom and democracy. Yet, with the fall of the Berlin 
Wall when we should be doing everything in our power to foster and 
nurture the development of genuinely democratic governments around the 
world, supporters of the North American Free Trade Agreement (NAFTA) 
would head us in the opposite direction. They ignore our historic 
commitment to freedom and human rights by entering into a ``free trade 
agreement'' whose principal beneficiary will be Mexico's ruling 
oligarchy. For the past 60 years, that oligarchy has systematically 
denied its citizens free elections, free speech, basic civil liberties 
and a genuinely free market.
    Instead of pursuing this narrow economic agreement inherited from 
the previous Administration, President Clinton should enunciate a broad 
vision for the Americas that encompasses not just economics and trade, 
but also political and social reform. As former Secretary of State 
George Shultz said, ``The embrace of free market economics is not 
sufficient to justify political repression.'' Now, as never before, the 
benefits of a truly free market will be enjoyed only when the market is 
buttressed by strong democratic institutions.
    Previous American initiatives to boost democracy in Latin America 
fell short of their lofty goals. President Franklin Roosevelt's Good 
Neighbor policy, President John F. Kennedy's Alliance for Progress and 
President Ronald Reagan's Caribbean Basin Initiative failed because our 
commitment to democratic and social reform never matched our rhetoric. 
Billions of dollars in aid money were squandered by corrupt regimes who 
were more interested in helping themselves than with raising living 
standards. For example, we propped up the Shah of Iran for decades, 
only to reap the whirlwind of militant Shiite fundamentalism. We 
embraced the Somoza oligarchy in Nicaragua and wound up with the 
evangelical Marxism of the Ortega brothers.
    Today, the country at issue is Mexico. We have an historic 
opportunity to foster democratic institutions and genuine economic 
development on our southern border. Our choice is clear: We can be a 
force for change to promote democracy and build a thriving middle 
class. Or we can align ourselves with the ruling oligarchy that thwarts 
the Mexican people's aspirations for representative democracy.
    In more than 2,000 pages of the NAFTA text, the word ``democracy'' 
does not appear. NAFTA only locks in the status quo in Mexico. I 
propose an alternative approach that puts democracy first and rewards 
democratic progress with economic and trade privileges culminating the 
creation of a North American Common Market--a partnership whose 
membership is predicated upon a shared commitment to the basic 
principles of a democratic society: free elections, free speech and 
free markets.

                         THE ILLUSION OF REFORM

    Throughout Mexico's history, a number of Mexican leaders have 
promised to wipe out corruption and reform the political system. Even 
Porfirio Diaz, Mexico's turn-of-the-century dictator, arranged 
electoral charades to create the illusion of democracy. While current 
President Carlos Salinas de Gortari has instituted substantial reforms, 
he has been careful not to challenge the power structure that has ruled 
Mexico for the past 60 years.
    Today, U.S. editorial writers hail Salinas and his American-
educated technocrats as valiant reformers who have cleaned up a corrupt 
political system and overhauled an inefficient statist economic system. 
In truth, however, the ``new'' Mexico is strikingly like the old. Most 
of the political reforms undertaken by the Salinas Administration are 
nothing more than window dressing designed to mollify NAFTA's critics 
in the United States. As the Salinas era ends, a careful examination of 
the record shows that for all the international fanfare, the actual 
political reforms have been modest and largely cosmetic. Human rights 
violations, electoral fraud and corruption remain endemic in Mexico. 
Writing in the September/October edition of Foreign Affairs, professor 
Jorge G. Castaneda said: Mexico's underlying problems persist. It 
retains a largely corrupt and unchallenged State that possesses only 
the merest trappings of the rule of law. The enduring obstacles to 
Mexico's modernization--its repeated failure to transfer power 
democratically or to remedy the ancestral injustice of its society--
remain and will require Mexico to continue to change itself, with or 
without a trade accord.
    Even The Economist acknowledges, ``The ugly truth is that Mr. 
Salinas and his band of bright technocrats, adored though they are by 
the great and good of the international conference circuit, wielded 
power courtesy of PRI fixers and worse in the countryside.'' While 
former U.S. Presidents and Secretaries of State sign their names to op-
ed pieces praising Mexico's reforms, the State Department's February 
1993 report on human rights paints a starkly different picture. It 
details the Mexican government's complicity in electoral fraud, 
torture, politically motivated murders, suppression of independent 
labor unions and systematic control of the media.
    ``To maintain power the PRI [Institutional Revolutionary Party] has 
relied on extensive public patronage, the use of government and party 
organizational resources, and according to respected independent 
observers, electoral fraud,'' the State Department report said.
    Mexico's ``reforms'' are nothing new. Our neighbor has a long 
history of either passing progressive legislation governing labor and 
human rights, or of signing international agreements that ostensibly 
guarantee these rights. Mexico also has a long history of not living up 
to these agreements.
    In 1990 with great fanfare, President Salinas presented a new 
Federal Election Code and established a Federal Electoral Institute. 
These electoral reforms might appear a dramatic departure from the 
past. But in reality, they are only designed to legitimize the status 
quo while giving the illusion of fairness. It is important to note that 
the new Electoral Commission is not independent. Instead, it is stacked 
with members of the ruling party. In addition, the final arbiter of 
elections is the Minister of the Interior--the Mexican official charged 
with maintaining domestic order. That position is currently held by 
Patrocinio Gonzalez, former Governor of the State of Chiapas. It is 
widely recognized that his term as Governor was marked by widespread 
electoral fraud and the imprisonment of Indians, teachers and Catholic 
priests who dared to challenge the ruling party.
    Despite the enactment of electoral reforms, Mexican elections 
continue to be exercises in deceit. As recently as 1992, gubernatorial 
elections in Michocan were marked by widespread fraud and the PRI 
candidate was forced to step down, only to be replaced by another hand-
picked candidate.
    This winter, the atmosphere of fraud will continue. Like the PRI's 
rulers before him, President Salinas will engage in the Byzantine 
ritual of tapping his successor--a process appropriate for Yale secret 
society, not a representative democracy. The state then will throw its 
tremendous financial and media resources behind the anointed successor, 
who, in all likelihood, will be the figurehead for Mexico's elite 300 
for another 6 years.

                          HUMAN RIGHTS RECORD

    More than a decade ago, then-Deputy Secretary of State Warren 
Christopher, highlighted the importance of the link between human 
rights and the free market. ``Respect for human rights creates an 
atmosphere for stability in which business and investment can 
flourish.'' Yet Mexico's record on human rights is not consistent with 
the Clinton administration's emphasis on basic human dignity.
    The State Department's human rights report notes, ``Several 
politicians and human rights activists were killed in 1992,'' and that 
``[t]here continues to be cases of extrajudicial killing by police.'' 
Although Mexico has established an independent commission on human 
rights, the State Department notes that ``its recommendations have been 
implemented only partially.''
    According to the State report, other human rights abuses committed 
by the Mexican government include torture--``the most commonly used 
methods include threats, beatings, asphyxiation, and electric shock''--
and ``frequent incidents of arbitrary arrest and imprisonment.'' In 
1992, the United Nations Committee Against Torture strongly criticized 
Mexico's record of ``torture with impunity.''

                             MEDIA CONTROL

    Threats, intimidation, and violence are not the only means that 
Mexico's ruling party uses to maintain its hold on the reins of power. 
In an era in which the rapid dissemination of information helped bring 
down the Berlin Wall, Mexico's ruling party tightly controls access to 
the public media.
    Until last month, one of Mexico's two principle television stations 
was owned by the government. The other network was safely controlled by 
one of the PRI's top fund-raisers, Emilio Azcarrega. Recently, the 
Mexican government announced that it was selling the government-owned 
station to yet another PRI fund-raiser--Ricardo Salinas Pliego--who 
will continue the station's pro-government and pro-party slant.
    In fact, after gaining control of the station, Salinas Pliago 
frankly stated that he will have to continue its pro-government 
programming because ``Mexico is not yet ready for democracy.''
    Although Mexico has independent newspapers and magazines which give 
the illusion of a free press, the State Department human rights report 
shows that there are ``significant restrictions on press freedoms.''

                         A PERFECT DICTATORSHIP

    Perhaps Peruvian writer Mario Vargas Llosa offered the best 
description of the Mexican political system. In describing Mexico as 
the ``perfect dictatorship,'' Llosa wrote that it is ``the permanence 
of a party not a man, a party that is unmovable, a party that gives 
enough space to criticism, as long as it serves its interests, because 
in this way it shows that it is a democratic party; but suppresses by 
any means the criticism that somehow endangers its permanence.''
    A fundamental question that has never been addressed is whether 
Mexico's tradition of authoritarian, one-party rule is compatible with 
our form of democratic capitalism. Senate Finance Committee Chairman 
Daniel Patrick Moynihan has succinctly framed the debate on NAFTA: 
``How can you have a free trade agreement with a country that hasn't 
had a free election?''
    NAFTA proponents argue that NAFTA will raise living standards and 
gradually harmonize upwards wages and working conditions. Commentators 
are quick to praise the dramatic economic reforms that have transformed 
the Mexican economy. A recent editorial in Financial World proclaims, 
``Over the past several years Salinas has moved with great domestic 
risk toward opening what once was one of the most protected, corrupt 
and government-controlled economies. Should NAFTA fail--or die a slow 
death as the U.S. equivocates--Salinas's efforts would be discredited 
and the old order could return.'' The obvious flaw in this argument is 
that the old order has not been swept away. As in the case of the 
political reform, the tight-knit group that for decades has exercised 
political and economic power has not been challenged.

                          AN ELITE IN CONTROL

    Augustin Legoretta, a prominent businessman and former president of 
BANAMEX (one of the principal banks in Mexico), provided this candid 
assessment of how the Mexican economy operates: ``A very comfortable 
little group of 300 people make all the economically important 
decisions in Mexico.'' This comfortable group has acquiesced in the 
government's decision to tear down the ``Gringo Go Home'' sign and open 
their country to foreign investment by offering a low-wage, high-
productivity platform for export into the United States. In return for 
supporting Salinas's economic reforms, Mexico's corporate elite have 
enjoyed a financial bonanza. Mexico's high-flying stock market, the 
``Bolsa Mexicana,'' has created paper millionaires and even 
billionaires. Before Salinas took office, Fortune listed two Mexicans 
in their list of billionaires; 6 years later there are twenty-two. Not 
surprisingly, the Salinas administration's ambitious privatization 
policy has rewarded many of the President's closest political 
associates: Carlos Slim, a financier and PRI fund raiser who won 
control of the telephone company TELMEX one of the state run banks; 
Pablo Brener, another PRI fund raiser who was awarded Mexicana 
Airlines; and Jorge Larrea, a close friend who now owns CANNEA, the 
country's largest government-owned copper mine.
    Questions have arisen over the conduct of Mexico's privatization 
programs, including whether there is a truly competitive system of open 
bidding. In addition, U.S. companies are allowed to own only minority 
interests in these companies. Under NAFTA, Mexican negotiators have 
been careful to protect the powerful interests that have benefited from 
the privatization. For example, the Mexican conglomerate VITRO, a world 
class maker of flat glass, will benefit from a 10-year phase-out of the 
tariff on flat glass while the U.S. tariff is phased out immediately. 
Similarly, the recently privatized banking system will benefit from 10 
years of protection, and U.S. banks will be strictly limited to a small 
percentage of the Mexican market. To reward the PRI for their 
``business-friendly environment,'' Mexico's top financiers held an 
intimate--and expensive--dinner party, with guests pledging $25 million 
each to the ruling party. One participant even boldly proclaimed that 
he would be willing to pledge twice this amount because he had 
prospered so handsomely during the Salinas Administration. While the 
proponents of NAFTA praise the ``free market'' reforms in Mexico, in 
reality, Mexico is pursuing a development model that leaves very little 
to the magic of the marketplace.

                        A CLOSED ECONOMIC SYSTEM

    Far from being a model of free market development, Mexico is 
following a much different path, as Finance Minister Pedro Aspe Armella 
described in 1991: The postwar experience [has called into question] 
the assumption underlying . . . comparative advantages [that] were more 
persuasive in the eighteenth and nineteenth centuries when many 
industries were fragmented, production was more labor- and less skill-
intensive, and much trade reflected differences in growing conditions, 
natural resources and capital . . . Widely applicable technologies such 
as microelectronics, advanced materials and information systems have 
rendered obsolete the traditional distinction between high and low 
technology industries.
    BusinessWeek went further in a cover story: In their drive to 
modernize Mexico, Salinas and his planners command nearly every 
variable of the economy. To smother inflation and preserve Mexico's 
huge labor cost gap with the U.S. and other producers, Salinas fixes 
salaries through a complex business labor agreement known as el pacto. 
He anoints and boots out labor union bosses and State Governors alike. 
A few years ago, he quietly banished an obstreperous American president 
of Chrysler de Mexico, who was quickly replaced by a Mexican. Salinas 
and his technocrats juggle import duties and steer investment from one 
region to another. In short, Salinas and his number crunchers run a 
near command economy much closer to the Asian model than any country in 
the West.
    Mexico has received international accolades for producing an 
economic miracle, yet growth has averaged only 2 percent for the past 6 
years. During the dark days of import substitution, Mexico's GDP grew 
by over 4 percent. However, much of this ``growth'' was the result of 
flight capital that has returned to earn higher interest rates.
    For the ``elite 300'' who have reaped huge rewards from 
privatization, Mexico's reforms have produced unprecedented wealth; 
unfortunately, much of this wealth has been achieved at the expense of 
the Mexican worker. The World Bank, noted that Mexico's 1992 per capita 
GDP was 5 percent below the country's 1980 per capita GDP. In the last 
10 years, on average, Mexicans have seen their take-home pay decline by 
40 percent. In a country that already suffers from one of the worst 
income distributions in the Western Hemisphere, Mexico's ``new'' 
development path has exacerbated the gap between rich and poor. Over 
the last decade, the richest 10 percent of the population saw its share 
of the national wealth increase by 15 percent. During the same period, 
25 percent of Mexico's tiny middle class fell into the ranks of the 
poor. In addition, half of the country still does not have electricity 
or running water; some Mexican states advertise labor for 99-cents-an-
hour; and 12-year-olds are included in the official labor statistics.

                        JOBS AND CONSUMER GOODS

    To provide foreign investors with a pliant work force, the 
government has actively intervened to thwart the formation of 
independent trade unions. When a renegade labor leader tried to 
organize the Maquiladora plants, the Mexican government promptly 
arrested him. When workers at Volkswagen tried to form an independent 
union, President Salinas personally intervened, using the Mexican army 
to force a violent end to the strike. He later acquiesced in 
Volkswagen's decision to fire all 14,000 workers and rehire only those 
workers who pledged not to join an independent union. Smashing 
independent unions and freezing wages at third-world levels is not 
consistent with the stated goals of the ``aperatura,'' or ``economic 
opening,'' which in theory raises living standards. As BusinessWeek 
noted, the irony of the Salinas era is that ``many Mexican workers 
still can't afford to buy the products that they turn out.''
    Advocates of NAFTA believe the agreement will not spur the flight 
of jobs south of the border. They argue that the trade liberalization 
envisioned in NAFTA will increase U.S. exports to Mexico, and therefore 
increase jobs in the United States. To support this claim, they point 
to our burgeoning trade surplus with Mexico. Since Mexico opened its 
economy to U.S. exports, our former trade deficit has been replaced by 
a $4 billion surplus. Under Salinas, Mexico's trade picture has 
significantly deteriorated. This year, Mexico's overall trade deficit 
will balloon to $20 billion. Consumer demand, however, accounts for 
only a small portion of our trade with Mexico. According to the trade 
statistics provided by Mexican trade officials to U.S. negotiators, 55 
percent of U.S. exports never enter the Mexican market. They are simply 
parts shipped to gleaming U.S.-owned factories for assembly and re-
shipment back to the United States. This is how the Brookings 
Institute's Nora Lustig explains Mexico's current account deficit:
    ``The good news [for Mexico] is that the highest increase is to be 
found in capital goods imports (24.8 percent) and the lowest in 
consumer goods (10.6 percent) This upsurge in imports is in part a 
response to the expansion of productive capacity in anticipation of 
Mexico's positive outlook.
    ``The current large imbalance in the trade account may well be a 
one time phenomenon in the sense that it is the result of modernization 
of the productive plant that will soon render its fruits in the form of 
higher net exports. If the current expansion pays off in higher 
productivity growth in the future, the disequilibrium will disappear 
and so will the real appreciation of the exchange rate.''
    Our own trade data support this position. The majority of U.S. 
exports are in two categories: capital goods and industrial supplies. 
U.S. Trade Representative Mickey Kantor points with pride to the fact 
that the fastest growing segment of U.S. exports is in consumer goods. 
A close examination shows that they are growing from a small base and 
still account for a smaller overall percentage of our exports. With a 
per capita income of approximately $3,000--still 5 percent below 
Mexico's 1980 level--and one of the worst income distributions in the 
Western Hemisphere, Mexico will take years--if not decades--to become a 
significant market for consumer goods.

                       IT'S THE LOCATION, STUPID

    That much-ballyhooed ``great sucking sound'' of American jobs going 
to Mexico because of NAFTA will be heard loud and clear in another 
incarnation. NAFTA will suck foreign companies into Mexico so they can 
win cheap, duty-free entry into the U.S. market. For years, Asian 
investors, particularly Japanese burned by Mexico's debt crisis, have 
been reluctant to invest in Mexico without adequate protection for 
their investment. NAFTA will provide that protection, which is why Niki 
Weekly notes that the ``Bank of Tokyo is Bullish'' on NAFTA. And that's 
why Volkswagen executives boast they will use Mexico as their launching 
pad into the U.S. market. But European and Japanese companies are not 
alone. The Korean government is providing tax incentives for companies 
that open in Mexico. China's Communist government-owned textile company 
is opening a yarn-spinning operation in Mexico.

                     SOWING THE SEEDS OF DISCONTENT
 
   If we rush to pass a NAFTA which sanctions a program of economic 
development based on the suppression of wages and living standards, we 
will be sowing seeds of discontent among the Mexican masses. Rather 
than building a stable economic partner, we will create the conditions 
for civil unrest. Indeed, the classic prescription for civil unrest is 
an entrenched, aloof leadership that raises the expectations of its 
populace. When the expectations are not met, civil order breaks down.
    As the PRI pursues a policy that beats down wages while demanding 
increases in productivity, the basic needs of the work force will go 
unmet. Without democratic institutions to serve as a check against 
arbitrary power, Mexico will remain a haven for the exploitation of 
labor and the environment.
    NAFTA supporters argue that our two economies are already in the 
process of integration. This is true, which is why we have an 
unprecedented opportunity to encourage Mexico to adopt genuine 
political and economic reforms. But the proponents of NAFTA have never 
advocated using this process as a way to encourage fundamental change 
in Mexican society. Instead, what NAFTA advocates propose is a 
historical first--a shotgun marriage between a developed, First World 
Nation and an undeveloped, Third World country. As hundreds of 
thousands of unemployed American workers have discovered, ``The jobs in 
the U.S. that are vulnerable are not the $6-an-hour jobs, but the $18-
an-hour ones. It goes to the core of the U.S. industrial base,'' labor 
economist Harley Shaiken told BusinessWeek in 1992.
    Furthermore, the Administration and some Members of Congress 
believe that tacking on hastily arranged side agreements regarding 
labor and the environment will correct an approach to hemispheric 
integration that locks in Mexico's status as a low-wage export 
platform. But ill-conceived side agreements cannot rectify a pact based 
on a flawed premise. No side agreement can adequately redress the 
tremendous disparity between our economies. Nor will side agreements 
improve enforcement of labor laws or environmental regulation.
    Mexico has adopted tough laws to protect labor and the environment, 
but its commitment to enforcement is inadequate. While the Mexican 
constitution provides impressive guarantees for the formation of 
independent labor unions, it is widely known that the PRI controls 
labor bosses. In addition, a 1992 General Accounting Office survey 
found that none of the American-owned plants they surveyed in Mexico 
complied with Mexico's environmental regulations. Also, several media 
organizations have documented the environmental disaster festering on 
the border.
    Finally, while NAFTA does not address immigration, the treaty's 
proponents proclaim that it will slow the tidal wave of immigrants 
across the border. They argue that as new factories open in Mexico and 
more jobs are created, immigration will slow because workers will 
choose to stay home. This, however, is not borne out by recent history 
or demographics. The explosion of Maquiladora plants along the Mexican 
border has only served as a training ground and springboard for 
Mexicans eager to flee squalor. Maquiladoras have suffered tremendous 
turnover--the average worker stays 18 months before he seeks higher 
wages in the U.S. Finally, Mexico's economy will have to grow more than 
6 percent a year to accommodate the 1 million new workers that enter 
the workforce each year and the hundreds of thousands of agricultural 
workers that will be displaced by the opening of Mexico's agricultural 
market. And since few predict that the Mexican economy will grow by 6 
percent, Mexico's surplus workers likely will head north.

               CREATION OF A NORTH AMERICAN COMMON MARKET

    Instead of rushing pell-mell to integrate an underdeveloped economy 
with a developed economy, we should follow the example set by the 
European Community. The Community's decision to integrate Spain, 
Portugal and Greece was the result of several years of intense 
negotiations. As a pre-condition of accession to the Community, the 
Council of Europe required these nations to adopt significant reforms 
to their political and economic systems. Indeed, the preamble of the 
accession agreement states, ``The principles of pluralist democracy and 
respect for human rights form part of the common heritage of the 
peoples of the states brought together in the European Communities and 
constitute essential elements of membership.''
    Furthermore, for several years Turkey has unsuccessfully sought 
admittance to the Community. According to the Director General of the 
Community, Turkey is not an appropriate candidate for membership for 
three reasons:
    1. Turkey's economy was not compatible with the EC's. Integration 
would result in huge costs to fit Turkey into the social framework of 
the Community.
    2. The EC could not absorb Turkey's rapidly increasing population 
and unemployment rate.
    3. Democracy in Turkey still lacked extensive protection of 
individual civil and political rights.
    The integration of Spain and Portugal involved a significant 
transfer of resources from the developed to the less developed regions 
of the Community. Spain and Portugal received over $5.4 billion per 
year from the European Regional Development Fund and the European 
Social Funds. These funds were used to assist both regions and 
individuals who might be harmed by each successive stage of trade 
liberalization. The proceeds of the funds were also used to stimulate 
investment and in the development of infrastructure in these countries. 
This is a policy we should adopt toward Mexico.
    A North American Common Market would require the nations of North 
America to enter into a social compact to establish minimum standards 
for labor rights and environmental protection as well as a common 
commitment to protect the individual liberties that are the foundation 
of a democracy. A North American Common Market, with a common external 
tariff, could be an effective vehicle for competing with the emerging 
trade blocs in Europe and Asia.
    Before admitting Mexico and other nations of Central and Latin 
America, the gross disparity in income levels must be addressed. To 
narrow the development gap, a fund similar to the European Regional 
Development Fund and the European Social Fund should be established to 
ease this transition. The proceeds of the fund would be devoted to 
upgrading Mexico's antiquated infrastructure and to cleaning up the 
environmental mess along the border.
    Other developmental projects could be financed by swapping existing 
Mexican debt for development bonds backed by zero coupon bonds (U.S. 
Treasury notes). In addition, the U.S. should expand debt relief 
proposals. Latin America's crushing debt burden is still a significant 
impediment to its sustainable and equitable growth. Previous attempts 
at debt relief failed to make a significant dent in Mexico's 
outstanding debt. Even after implementation of the Brady Plan, 
approximately 30 percent of Mexico's export revenues are devoted to 
debt service; if both internal and external debt are counted, the 
figure jumps to 45 percent. Thus, revenue generated by Mexico's 
outward-looking economic policy is flowing out of the country rather 
than being used to raise living standards throughout Mexico.
    The integration of countries with such disparate levels of 
development will also require close coordination of macroeconomic and 
investment policies. Finance ministers should establish investment 
guidelines to prevent the wholesale de-industrialization of the 
developed areas of the North American Common Market. In addition, 
exchange rate policy should be coordinated to prevent competitive 
devaluations that would depress wages and destabilize current accounts.
    Finally, entry into the Common Market must be predicated on the 
adoption of real democratic reforms that produce free and fair 
elections. Only after Mexico becomes a functioning democracy will the 
gap in income levels and wage rates narrow. Once this is accomplished, 
Mexico, the U.S., and Canada should proceed with wholesale elimination 
of tariff and non-tariff barriers.

                               CONCLUSION

    Thirty years ago, another young vigorous President offered the 
Americas a vision of shared destiny, but one that addressed both 
economic change and social/political change. As John F. Kennedy said, 
``No program that is restricted to the technicalities of economic 
development can fully answer the needs of the Americas. Only an 
approach to economic progress and social justice which is based on the 
wide acceptance of the fundamental ideals of political democracy and 
human dignity can conquer the many ills of our hemisphere and respond 
fully to the aspirations of our people.''
    After decades of ignoring the calls for change, it's time we align 
ourselves with the forces of change and renew our common commitment to 
economic and social progress. If we don't promote real democratic 
change in Latin America and champion economic growth at home, the 
United States could fulfill Harvard economist Richard Freeman's fear: 
``One possibility is for us to become a class society like those in 
Latin America . . . That's the direction we're headed.''
  

                                  
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