    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                         PRESIDENT BUSH'S TRADE AGENDA
    =======================================================================

                                    HEARING

                                   before the

                          COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 26, 2003

                                   __________

                               Serial No. 108-12

                                   __________

             Printed for the use of the Committee on Ways and Means

                          COMMITTEE ON WAYS AND MEANS

                       BILL THOMAS, California, Chairman

    PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
    E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
    NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
    AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
    WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
    JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
    DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
    JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
    JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
    SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
    JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
    MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
    ROB PORTMAN, Ohio                    XAVIER BECERRA, California
    PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
    J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
    JERRY WELLER, Illinois               MAX SANDLIN, Texas
    KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
    SCOTT MCINNIS, Colorado
    RON LEWIS, Kentucky
    MARK FOLEY, Florida
    KEVIN BRADY, Texas
    PAUL RYAN, Wisconsin
    ERIC CANTOR, Virginia
                        Allison H. Giles, Chief of Staff
                      Janice Mays, Minority Chief Counsel

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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Advisory of February 14, 2003, announcing the hearing............     2

                                    WITNESS

    U.S. Trade Representative, Hon. Robert B. Zoellick, Ambassador...    12

                                     ______

                           SUBMISSIONS FOR THE RECORD

    American Drawback Service, LLC, Englewood Cliffs, NJ, Tom
      Ferramosca, letter.............................................    86
    American Textile Manufacturers Institute, statement..............    86
    Barnes, Donnie B., National Association of Foreign-Trade Zones,
      letter.........................................................   145
    Canahuati, Mario M., Embajada de Honduras, letter................   113
    Carmichael International Service, Seattle, WA, Steve Orton,
      letter.........................................................    92
    Carnegie Endowment for International Peace, statement and
      attachments....................................................    92
    CENCIT, Guatemala, Guatemala, statement..........................   107
    Comstock & Theakston, Inc., Oradell, NJ, William A. Hagedorn,
      statement......................................................   109
    Denninger, Sr., Edward P., J.G. Eberlein & Co., Inc., West Islip,
      NY, statement..................................................   144
    E.I. du Pont de Nemours & Company, Wilmington, DE, J.S. Kempf,
      letter.........................................................   111
    Electronic Industries Alliance, Arlington, VA, Brian Kelly,
      letter.........................................................   112
    Embajada de Honduras, Mario M. Canahuati, letter.................   113
    Embassy of the Government of the Dominican Republic, statement...   118
    Faleomavaega, Hon. Eni F.H., a Representative in Congress from
      American Samoa, statement......................................   119
    Ferramosca, Tom, American Drawback Service, LLC, Englewood
      Cliffs, NJ, letter.............................................    86
    Florida Citrus Mutual, Lakeland, FL, Andy W. LaVigne and Matthew
      T. McGrath, letter.............................................   120
    Government of the Commonwealth of Puerto Rico, San Juan, Puerto
      Rico, Hon. Milton Segerra, letter and attachments..............   137
    Hagedorn, William A., Comstock & Theakston, Inc., Oradell, NJ,
      statement......................................................   109
    Hebert, Marc C., Preis, Kraft, & Roy, PLC, New Orleans, LA,
      letter and attachments.........................................   157
    J.G. Eberlein & Co., Inc., West Islip, NY, Edward P. Denninger,
      Sr., statement.................................................   144
    Kelly, Brian, Electronic Industries Alliance, Arlington, VA,
      letter.........................................................   112
    Kempf, J.S., E.I. du Pont de Nemours & Company, Wilmington, DE,
      letter.........................................................   111
    LaVigne, Andy W., Florida Citrus Mutual, Lakeland, FL, letter....   120
    McGrath, Matthew T., Florida Citrus Mutual, Lakeland, FL, letter.   120
    National Association of Foreign-Trade Zones, Donnie B. Barnes,
      letter.........................................................   145
    National Association of Manufacturers, Frank Vargo, letter.......   146
    National Electrical Manufacturers Association, Rosslyn, VA,
      statement and attachment.......................................   150
    Orton, Steve, Carmichael International Service, Seattle, WA,
      letter.........................................................    92
    Preis, Kraft, & Roy, PLC, New Orleans, LA, Marc C. Hebert, letter
      and attachments................................................   157
    Sanders, Karen Corbett, Verizon, letter..........................   178
    Segerra, Hon. Milton, Government of the Commonwealth of Puerto
      Rico, San Juan, Puerto Rico, letter and attachments               137
    U.S. Tuna Foundation, statement..................................   176
    Vargo, Frank, National Association of Manufacturers, letter......   146
    Verizon, Karen Corbett Sanders, letter...........................   178
    Zero Tariff Coalition, statement and attachment..................   180

                         PRESIDENT BUSH'S TRADE AGENDA

                                  ----------

                          WEDNESDAY, FEBRUARY 26, 2003

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:35 a.m., in
    room 1100 Longworth House Office Building, Hon. Bill Thomas
    (Chairman of the Committee) presiding.
        [The advisory announcing the hearing follows:]

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                                                    CONTACT: (202) 225-1721
    FOR IMMEDIATE RELEASE

    February 14, 2003
    FC-4

                          Thomas Announces Hearing on

                         President Bush's Trade Agenda

        Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
    and Means, today announced that the Committee will hold a hearing on
    President Bush's trade agenda. The hearing will take place on
    Wednesday, February 26, 2003, in the main Committee hearing room, 1100
    Longworth Building, beginning at 10:30 a.m.

        The sole witness at this hearing will be United States Trade
    Representative Robert B. Zoellick. However, any individual or
    organization not scheduled for an oral appearance may submit a written
    statement for consideration by the Committee and for inclusion in the
    printed record of the hearing.

    BACKGROUND:

        On August 6, 2002, the President signed into law the Trade
    Promotion Authority Act (TPA) of 2002 (P.L. 107-210), which provides to
    the President the authority to negotiate trade agreements and bring
    them back to Congress under certain procedures setting forth detailed
    negotiating objectives and ensuring extensive consultation with
    Members. Since TPA became law, the President has notified Congress of
    his intent to enter into free trade agreements with Chile and
    Singapore. He has also notified Congress of his intent to enter into
    negotiations with Morocco, the Central American countries, Australia,
    and the Southern African Customs Union. In addition, he is continuing
    negotiations to establish the Free Trade Area of the Americas as well
    as multilateral negotiations in the World Trade Organization (WTO) to
    expand U.S. opportunities in trade in agriculture, industrial goods,
    and services.

        In announcing the hearing, Chairman Thomas stated, ``Now that TPA
    is in place, we have the chance to regain our leadership role in trade
    negotiations and to eliminate foreign trade barriers to our goods and
    services. The Administration has moved ahead quickly to establish an
    ambitious agenda for seizing these opportunities. I am committed to
    ensuring the Administration's adherence to the rigorous consultation
    process and the detailed negotiating objectives established in TPA.
    This hearing, which will give Ambassador Zoellick the opportunity to
    lay out the President's trade priorities within the TPA framework, is
    an important component of our bipartisan oversight responsibilities.''

    FOCUS OF THE HEARING:

        The hearing is expected to examine current trade issues such as:
    (1) implementation, under TPA procedures, of the Chile and Singapore
    free trade agreements, which have been initialed and are expected to be
    signed at the end of April, (2) other free trade agreements, including
    those notified by the President (Morocco, the Central American
    countries, Australia, and the Southern African Customs Union) and the
    Free Trade Area of the Americas, (3) prospect for trade expansion in
    agriculture, industrial goods, and services through multilateral
    negotiations in the WTO, (4) compliance with WTO dispute settlement
    decisions, (5) the status of Russia and other former Soviet Republics
    under the Jackson-Vanik amendment, (6) other bilateral trade issues,
    and (7) legislation to implement U.S. obligations in the Kimberley
    Process (concerning rough diamonds) in a WTO-consistent manner.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

        Please Note: Due to the change in House mail policy, any person or
    organization wishing to submit a written statement for the printed
    record of the hearing should send it electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    (202) 225-2610, by the close of business, Wednesday, March 12, 2003.
    Those filing written statements that wish to have their statements
    distributed to the press and interested public at the hearing should
    deliver their 200 copies to the full Committee in room 1102 Longworth
    House Office Building, in an open and searchable package 48 hours
    before the hearing. The U.S. Capitol Police will refuse sealed-packaged
    deliveries to all House Office Buildings.

        Chairman THOMAS. Mr. Ambassador, welcome once again to the
    Committee on Ways and Means. We are pleased to know that you
    are back from another trip abroad. That means you are working
    hard in carrying out the Trade Promotion Authority (TPA), which
    became law last August 6. I know you are pressing forward on
    multiple fronts.
        We have been on the sidelines too long. It is nice to know
    that we are engaged. More important than being engaged, work
    product is actually being produced. I know that you have
    concluded negotiations with Chile and Singapore and you are in
    the process of screening that, and it is before a limited
    number of eyes and will be before a larger number of eyes very
    soon.
        We are concerned on a number of fronts--World Trade
    Organization (WTO), we look forward to the Central American
    Agreement moving forward to a Free Trade of the Americas--and
    on a number of fronts I think you will find that Members of
    this Committee are interested in providing you with questions
    and will be listening carefully to your answers regarding
    Europe in general and perhaps particular countries within the
    European Community.
        We look forward to your comments, and I would briefly
    recognize the Chairman of the Subcommittee on Trade, the
    gentleman from Illinois, Mr. Crane, for any remarks he may
    make.
        [The opening statement of Chairman Thomas follows:]
        Opening Statement of the Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Good Morning. This is a hearing to discuss the United States trade
    agenda for 2003. Ambassador Zoellick, we are pleased to have you here
    today to discuss the important progress we have made and will continue
    to make in expanding international trade.
        Since the President signed Trade Promotion Authority (TPA) into law
    on August 6, you have pressed forward on multiple fronts. The truth of
    the matter is your assignment has been one of catching-up. After eight
    years without TPA, the United States remains behind the wave of trade
    agreements that swept the world economy while American negotiators were
    sitting on the sidelines. The enactment of TPA has put the United
    States back in the business of negotiating meaningful trade agreements
    for U.S. workers, manufacturers and farmers.
        Having concluded negotiations with Chile and Singapore, you are
    moving on to initiate negotiations with other nations. Reaching free
    trade agreements, even with smaller countries and regions, allows the
    United States to establish benchmarks for our negotiations within the
    World Trade Organization and towards a Free Trade Area of the Americas.
        Europe, however, continues to be among our most troublesome trading
    partners. I agree with you that initiating action in the WTO appears
    necessary to bring the European Union into compliance with existing
    disciplines that require trade barriers to U.S. exports, particularly
    in the area of biotechnology, to be justified on the basis of sound
    science. Europe's stance on agriculture market access and subsidies is
    also unacceptable and would cement historical inequities, disadvantage
    our farmers and relegate much of the developing world to perpetual
    dependence. A WTO agriculture deal along the lines Europe is proposing
    is a non-starter in Congress.
        Recently, I was asked about the possibility of an FTA with the
    European Union, to which I replied that FTAs today are possible with
    almost any country except the European Union!
        Ambassador Zoellick, I look forward to your comments on our
    difficult problems with Europe and on the many other ones facing USTR
    this year.

        Mr. CRANE. Thank you, Mr. Chairman. I also want to warmly
    welcome Ambassador Zoellick to the Committee. I am delighted
    that the administration has pursued trade negotiations on so
    many fronts. Now that the President has TPA, it is clear that
    the United States is back again in the driver's seat after a
    lapse of too many years.
        The conclusion of the negotiations on Chile and Singapore
    is long overdue, and I look forward to considering these bills
    as part of the TPA process sometime in late spring--the sooner
    the better, in my book.
        These bills will bring tremendous benefits to our farmers,
    companies, and workers, which should not be delayed any longer
    than absolutely necessary. I also congratulate the
    administration on taking seriously during the Chile and
    Singapore negotiations the consultation requirements that we
    put into the TPA bill.
        I now look forward to the negotiation of more free trade
    agreements (FTAs) involving Central American countries,
    Morocco, the South African countries, and Australia. I hope
    that we will consider additional countries, such as New
    Zealand, in the coming months. Crucial deadlines and the Free
    Trade Area of the Americas (FTAA) negotiations for hemispheric
    free trade by 2005 are coming up fast. I am pleased that the
    United States has aggressively pursued opportunities in the
    WTO, most recently on agriculture and on industrial tariffs. We
    all have serious questions about whether Europe has committed
    to achieving significant reforms in agricultural trade, as is
    called for in the Doha negotiating mandate. It is encouraging
    to see that Ambassador Zoellick has numerous avenues to pursue
    free trade agreements if the WTO negotiations bog down. I
    welcome his testimony.
        Chairman THOMAS. I thank the Chairman. The Chair now
    recognizes the Ranking Member of the Committee, the gentleman
    from New York, Mr. Rangel, for any comments he may wish to
    make.
        Mr. RANGEL. Thank you, Mr. Chairman. I soon will yield to
    Mr. Levin, but I want to always welcome the Ambassador for
    representing in the best possible light the United States of
    America, and also indicate that at some point I would like to
    discuss with him the possibility of the Dominican Republic
    being included in the Central American Free Trade Agreement in
    terms of the reputation of the United States, especially at a
    time that we are getting a lot of anti-American feeling. I also
    am concerned with opposition on pharmaceutical patents and its
    relationship to poor people having access to essential
    medicine. I am working with Mr. Levin and Mr. Moran and hoping
    that we can come up with a position that treats our
    pharmaceuticals fairly, but at the same time that we be known
    as a country that is concerned to the sensitive question of
    life-threatening diseases.
        Last, and on a more political issue, is the Foreign Sales
    Corp. (FSC) problem that we are having now with the WTO where
    our European friends have indicated that we can write the rules
    as long as we don't have to abide by them. I am certain that
    together we can come up with a solution that is equitable and
    acceptable to the WTO. I know that you say it is a Treasury
    problem, but to a large extent, your credibility is going to be
    dependent upon our ability to work this out.
        The Administration has been very successful in picking up
    one or two Democrats and calling these things bipartisan
    solutions to national problems. I don't think you are going to
    be able to do that in this particular case, but perhaps you
    might share with us at some point why the proposal supported by
    our Chairman in rewarding those people who do business offshore
    is more equitable than the idea of giving those benefits from
    the windfall taxes that we will be collecting to manufacturers
    in the United States.
        In any event, I am glad that you are here. Sorry I couldn't
    make the previous meeting, and I would like to yield, if the
    Chair would permit, to Mr. Levin.
        Mr. LEVIN. Thank you. Thank you, Mr. Chairman. Welcome,
    Ambassador. I have a full statement, and I want to summarize it
    as quickly as I could. I ask that the full statement be placed
    in the record, Mr. Chairman.
        Chairman THOMAS. Without objection.
        Mr. LEVIN. The prepared statement of the Ambassador, of
    you, Mr. Zoellick, includes numerous statements like, and I
    quote, ``rebuilding America's leadership on trade,'' ``America
    is back in the business of promoting open trade,'' ``reversing
    the retreat at home.''
        Let me make, if I might, a comment on this. I have made it
    before. It is a bit pointed, but I wanted to be clear, and I
    want to be clear on other matters that I state. I think it may
    be helpful, though it isn't always considered, I think,
    complimentary.
        I think those characterizations of trade policy pre- and
    post-the current Administration are simply wrong. There was
    progress under the Clinton Administration, and many of us
    Democrats on the Committee on Ways and Means, working with
    Republicans here, were an intrinsic part of that progress:
    Caribbean Basin Initiative (CBI), African Growth and
    Opportunity Act (AGOA), China Permanent Normal Trade Relations
    (PNTR), Jordan FTA, and the Uruguay round, among others.
        I don't want to fall into the same pitfall and caricature
    of the first 2 years of the Bush Administration. There has been
    some important movement on trade issues, for example, in Doha,
    the launch of the negotiations, which I supported actively,
    notwithstanding my concern that the text was unduly ambiguous.
    The temptation of proponents is to overstate the case and
    understate the challenges, and I believe this is true of the
    testimony today.
        There have been serious setbacks and disturbing stalemates,
    and a key point: the major challenges are still ahead of us. I
    believe in pursuing expanded trade not because more trade is
    invariably better, but because expanded trade can be a powerful
    tool to promote economic growth and improve standards of living
    in our country and around the world. To do so, trade policy
    must shape the rules by which trade and international economic
    policy is conducted, just as we do domestically, to maximize
    its benefits and to minimize its downsides.
        The economic backdrop against which you appear today is
    troubling. For several years now, the U.S. trade deficit has
    been hitting a new high almost every month. This deficit
    reflects both a decline in U.S. exports and an increase in
    imports. The deterioration is occurring in vital sectors where
    the United States supposedly has a comparative advantage, such
    as services and advanced technology.
        The trade deficit has been felt hard in the manufacturing
    sector. We have lost 2 million jobs since January 2001. The
    widening trade deficit has contributed to an already anemic
    economy. As the Economic Report of the President states,
    ``Trade deficits exert a drag on gross domestic product (GDP)
    growth.'' A Washington Post article estimates that the trade
    deficit sliced one-half of 1 percentage point off the GDP
    growth last year.
        For U.S. trade policy to contribute to economic growth, our
    policy has to, as I said, shape trade to maximize its benefits
    and minimize its downsides. In key respects, I think the
    Administration's trade policy has failed to do that. I start
    with the FSC issue that Mr. Rangel has mentioned. I think
    instead of working within the WTO to correct a flaw that
    disadvantages U.S. exporters, the Administration is now using
    the threat of retaliation by the European Union (EU) to advance
    a proposal that would repeal the FSC benefits for American
    exporters and use the money primarily to pay for reduced taxes
    on the offshore activities of U.S. firms.
        Another area that is of real concern relates to the WTO
    dispute settlement. You have announced some grand proposals to
    eliminate tariff barriers while at first, anyway, downplaying
    non-tariff barriers. In a sense, that has overshadowed the
    failure to use existing rules to ensure real market access to
    U.S. firms, in contrast with the approach of our trading
    partners.
        What is even more disturbing is that the actual decisions
    of the panels clearly violate the WTO mandate. What has been
    our response, the Administration response to this serious
    problem?
        Chairman THOMAS. The gentleman has 5 minutes.
        Mr. LEVIN. Well, I don't think I can finish in 5 minutes.
        Chairman THOMAS. Go ahead.
        Mr. LEVIN. All right. You are the Chairman.
        What has been U.S. Trade Representative's (USTR's) response
    to this problem? First, USTR agreed to open trade remedies for
    negotiation of the Doha Round, claiming that there were serious
    offensive interests for U.S. exporters. If there are such
    interests, where are the cases? To date, there have been zero
    cases filed alleging that U.S. exporters have been subject to
    wrongful unfair trade duties abroad.
        Another issue relates to pharmaceutical patents and
    medicines, as mentioned by Mr. Rangel. Here the Wall Street
    Journal recently reported, ``The Administration engaged in a
    post-election flip-flop in policy under pressure from the
    pharmaceuticals industry, thereby stalling progress on an issue
    so vital to people all over the world,'' and that you have
    worked on, Mr. Ambassador.
        Let me say just a brief word about the Chile and Singapore
    trade agreements.
        So, far there has been a failure to release the text, and
    that breaks a precedent that was established, for example, in
    North American Free Trade Agreement (NAFTA). I want to
    emphasize this. Restricting the availability of the text
    undermines the fundamental purpose of the 90-day notification
    period--public involvement.
        So, let me just suggest, as I close, a few components of
    the way, as I see it, and I think others on this Committee on
    the minority side, to move our trade policy forward.
        On FSC, take seriously the approach being suggested by Mr.
    Rangel.
        On Russia PNTR, do provide PNTR to Russia, but at the same
    time ensure a meaningful role for Congress in negotiations to
    bring Russia into the WTO as a number of us here have suggested
    and Senator Baucus.
        On drug patents and access to medicines, coverage should be
    broadened to allow developing countries, as we have written to
    you, that lack manufacturing capabilities to address
    effectively serious public health problems and not only the
    infectious epidemics that have now been identified.
        Let me just say a brief word about free trade agreements. I
    think there needs to be a clear, overall strategy. There can't
    be a cookie-cutter approach to them. In the case of the Central
    American Free Trade Agreement (CAFTA), a key issue of concern
    that Mr. Rangel and I have already flagged is the question of
    labor standards enforcement in CAFTA and the adequacy or lack
    of the Chile-Singapore approach in that context.
        As to the textiles agreement with Vietnam, the USTR should
    encourage implementation of core labor standards through
    positive incentives, as in the Cambodia model.
        In conclusion, the basic task, as many of us see it, before
    this Administration and our Committee was not, in quotes, ``to
    re-establish U.S. trade leadership around the globe,'' but
    instead to re-establish now a broad bipartisan coalition around
    U.S. trade policy from which the United States can truly and
    fully lead.
        Thank you, Mr. Chairman.
        [The opening statements of Mr. Shaw and Mr. Levin follow:]
    Opening Statement of the Honorable E. Clay Shaw, Jr., a Representative
                     in Congress from the State of Florida
        Mr. Ambassador, I want to talk to you about a trade dispute
    involving the Revpower Corporation, which was owned by my constituent,
    Mr. Robert Aronsson. This matter has been ongoing now for well over a
    decade, and I ask for your help.
        Allow me to briefly state the facts: In December 1989, SFAIC, a
    Chinese state-owned corporation, confiscated a factory owned by
    Revpower. In response, Revpower sought in 1993 and won a $4.9 million
    arbitration award from the Arbitration Institute of the Stockholm
    Chamber of Commerce against SFAIC.
        When Revpower attempted to enforce the award with the Chinese court
    in Shanghai, that court refused to even acknowledge that the suit had
    been filed for two years. When the Shanghai court finally adjudicated
    the suit, it was only after SFAIC transferred its assets to its parent
    company, The Shanghai Aviation Industry, that the Court then dismissed
    Revpower's suit on that ground that FSAIC had filed for bankruptcy and
    accordingly there were no assets against which the arbitral award could
    be enforced. Four years later, the Xuhui Bankruptcy Court, found that
    the SFAIC and SAIC ``conspired maliciously'' to evade the enforcement
    of the arbitral award by transferring property from SFAIC to its parent
    SAIC. But by then it was conveniently too late for the Chinese
    government to grant any relief to Revpower.
        As you are aware, China is required to enforce arbitral awards
    under the 1958 New York Convention on Recognition and Enforcement of
    Arbitral Awards. As SFAIC and SAIC were owned by the Chinese government
    at the time of the arbitration award. The Chinese government is bound
    by treaty to enforce and pay this award. Moreover, by failing to honor
    the Revpower award, the Government of China ratified the violative acts
    of the Shanghai Court and thus breached its treaty obligations under
    the New York Convention. The net result is that what was initially a
    small commercial dispute has now become a situation whereby the injury
    to the U.S.-owned entity stems directly from the Chinese government's
    willful violation of an international treaty.
        This debt to Revpower by the Chinese government has been
    outstanding now for over a decade, and with interest, now exceeds $11
    million. I contacted the previous Administration about this manner in
    writing on four occasions, with little result. Moreover, I asked your
    predecessor for her personal assurance that the office of the U.S.
    Trade Representative would vigorously pursue this matter with the
    Chinese, during a Ways and Means hearing in 2000, but nothing
    transpired.
        Therefore, Mr. Ambassador, can you appoint a representative in your
    office to look into this matter, with the hopes of resolving this
    problem, instead of just endlessly managing a problem. China is
    ignoring its international treaty obligations, and small American
    businesses are getting financially hurt. I urge you to be aware of the
    overall problem of the Chinese ignoring international arbitral awards.
    I implore you to use your office to work with your Chinese counterparts
    to finally bring closure to this matter. Thank you.

    Opening Statement of the Honorable Sander M. Levin, a Representative in
                      Congress from the State of Michigan
        The prepared testimony of Ambassador Zoellick includes numerous
    statements like, ``rebuilding America's leadership on trade, America is
    back in the business of promoting open trade, reversing the retreat at
    home.''
        These characterizations of trade policy pre- and post-the current
    Administration are simply wrong. There was progress under the Clinton
    Administration and many of us Democrats on the Ways and Means Committee
    were an intrinsic part of that progress. To conclude otherwise ignores
    CBI, AGOA, China PNTR, the Jordan FTA, the Uruguay Round agreements and
    many others.
        I do not want to fall into the same pitfall and caricature the
    first two years of the Bush Administration. There has been some
    important movement on trade issues. For example, in Doha I supported
    the launch of the negotiations notwithstanding my concern that the text
    was unduly ambiguous. But, the temptation of proponents is to overstate
    the case and understate the challenges, and I believe that is true of
    the testimony of the USTR.
        There have been some serious setbacks and disturbing stalemates
    and, a key point, the major challenges are still ahead us.
        To begin with, however, I believe that a basic precondition to the
    U.S. trade agenda operating on the right track at a time when
    globalization is moving ahead exponentially is having a consistent
    policy foundation. Most fundamentally, I believe in pursuing expanded
    trade not because more trade is invariably better, but because expanded
    trade can be a powerful tool to promote economic growth and improved
    standards of living in the United States and around the world. To do
    so, trade policy must shape the rules by which trade and international
    economic policy is conducted--just as we do domestically--to maximize
    its benefits and minimize its downsides.
    The Economic Backdrop
        The economic backdrop to Mr. Zoellick's testimony is troubling.
        For several years now, the U.S. trade deficit has been hitting a
    new high almost every month. The trade deficit in December hit a record
    high of $44.2 billion, which capped a record high $435 billion trade
    deficit for the year 2002. The widening of the trade deficit was
    particularly troublesome given that it continued at a time when the
    dollar's value was weakening.
        The vast and record trade deficit reflects both a decline in U.S.
    exports and an increase in imports.
        U.S. goods exports have declined significantly over the past two
    years. In 2000, U.S. goods exports stood at $771 billion. That figure
    declined by more than $50 billion during the first year of the Bush
    Administration to $718 billion. U.S. goods exports declined further in
    2002, falling to $682 billion, a level below that of 1999.
        Moreover, the deterioration is occurring in vital sectors where the
    U.S. supposedly has a comparative advantage: One example is services
    trade. Here, the surpluses in the U.S. services balance of trade have
    deteriorated in every year the Bush Administration has been in office--
    declining from $74 billion in 2000, to $69 billion in 2001, and
    dropping dramatically to $49 billion last year.
        The trade deficit has been felt hard in the manufacturing sector,
    which has seen a steep and steady erosion of jobs. Since January 2001,
    the U.S. has lost almost two million manufacturing jobs.
        In 2000, the United States had a net trade surplus in advanced
    technology products of $5 billion. In 2001, that surplus shrank by
    almost 20 percent, and in 2002, the surplus became a deficit of more
    than $17 billion. This is the first time that the U.S. has ever had a
    trade deficit in Advanced Technology Products since the Census began
    compiling data on those products, beginning with data from 1982. A
    deficit for the first time compared to an average trade surplus in
    Advanced Technology Products of over $27 billion throughout the 1990s.
        The point is not that trade is the sole cause of the country's
    continuing economic stagnation. There are several sides to the trade
    deficit, positive and negative. But, overall a poor trade performance
    has had real adverse effects for U.S. businesses and workers. The
    widening trade deficit has contributed to an already anemic economy. As
    the Economic Report of the President states, trade deficits exert a
    drag on GDP growth. A Washington Post article estimates that the trade
    deficit sliced one-half-of-one percentage point off the GDP growth rate
    last year.
        For U.S. trade policy to contribute to economic growth in the short
    and medium term that benefits the widest array of Americans, U.S.
    policy has to shape trade to maximize its benefits and minimize its
    downsides. In key respects, the Administration's trade policy has
    failed to do that.
    Trade Policy Problems
                FSC
        Perhaps the most obvious example of where the Administration's
    trade policy has failed to stand up for American workers, farmers and
    businesses is in the case of the FSC/ETI dispute with the EU.
        The Administration has chosen to ignore the expressly stated policy
    of the Congress to ensure that international rules do not discriminate
    against U.S. exporters in the treatment of tax systems. The FSC/ETI
    rules were designed to correct a flaw in WTO rules on border tax
    adjustments so that American companies and farmers would not be
    disadvantaged in competing against companies and farmers in Europe and
    other places. Realizing this flaw, Congress directed the Administration
    to work to correct the problem in the WTO negotiations. To date,
    however, the USTR has ignored Congress' request.
        Instead of working to correct a flaw that disadvantages U.S.
    exporters, the Administration has been using the threat of retaliation
    by the EU to advance a proposal that would repeal the FSC/ETI benefits
    for American exporters and use the money primarily to pay for reduced
    taxes on the offshore activities of U.S. firms. Regardless of the
    merits of sensible international tax reform standing on its own, to use
    the FSC benefits as a pay-for in this way is an affront to U.S.-based
    producers. Given dramatic declines in U.S. export performance, the
    Administration's response to the FSC/ETI loss stings American workers
    and manufacturers even harder.
                Flawed Approach to WTO Dispute Settlement
        Another area where the Administration has failed to act effectively
    to correct a festering and growing problem is in its approach to WTO
    dispute settlement. There are serious problems with the enforcement of
    the WTO agreements--by far, the most important single set of trade
    agreements in which the United States participates.
        At the WTO, the Administration's announcement of grandiose
    proposals that side-step key issues (for example, the USTR proposal to
    eliminate all tariff barriers downplaying the fact that the primary
    barriers faced by many U.S. industries are non-tariff) has been
    overshadowing the Administration's failure to use existing rules to
    ensure real market access for U.S. firms. The failure of the
    Administration to respond effectively to problems with the tools it
    already has raises the question: what is the point of concluding a slew
    of new trade agreements if they are not going to be enforced?
        Now in its third year under this Administration, the USTR has filed
    only five cases, barely more than two per year. This compares with 56
    cases in which the U.S. served as a complainant from 1995 to 2000--an
    average of almost 10 cases per year.
        The USTR's failure to push for U.S. rights in WTO dispute
    settlement stands in clear contrast with the approach of our trading
    partners. Since the Administration has been in office, there have been
    29 cases filed against the United States at the WTO. Of the cases
    against the United States that have been adopted during the
    Administration's tenure, the U.S. has lost 11 out of 13. Ten out of
    these eleven losses involved the U.S. trade remedy rules--safeguards,
    antidumping and countervailing duties.
        What is even more disturbing is the actual decisions of the panels
    in the cases. For example, the panels are going far beyond what the WTO
    agreements provide to pull in new concepts that the United States never
    agreed to such as ``substantive public international law.'' Going
    beyond the terms of the agreements clearly violates the WTO's mandate,
    which states plainly that panels and the Appellate Body not ``add to or
    diminish'' the rights and obligations of the United States or other WTO
    members. Notwithstanding this clear rule, WTO panels are creating
    obligations that neither the Administration nor Congress agreed to in
    signing and approving the Uruguay Round Agreements.
        What has been USTR's response to this serious problem? First, USTR
    agreed to open trade remedies for negotiation in the Doha Round,
    claiming that there were serious ``offensive interests'' in this area
    for U.S. exporters. If there are such interests, where are the cases?
    To date, the USTR has filed zero--zero cases alleging that U.S.
    exporters have been subject to wrongful unfair trade duties abroad.
        Further, last year Congress specifically directed Commerce,
    consulting with USTR, to develop a strategy to respond to the assault
    against the U.S. trade laws. Rather than take this duty seriously, the
    Administration presented Congress with a short paper, almost half of
    which consisted of an extensive discussion of the history of the WTO
    dispute settlement system not relevant to Congress' request. Most of
    the rest of the paper comprised a reprise of case summaries and ideas
    that had already been submitted to the WTO by the U.S.
        The paper contained virtually nothing on strategy, the focus of
    Congress' request. Rather, the paper spoke vaguely about the
    Administration's intent ``to address these concerns in both the DSU and
    Rules negotiations'' and to ``work within the current dispute
    settlement system to avoid panel or Appellate Body findings that would
    be of concern.'' The report contains no strategy, no action plan, not
    even an indication as to how the Administration intends to ``address''
    the problems in the negotiations or how it intends to ``avoid'' dispute
    settlement decisions that come out literally quarterly that undermine
    American laws.
        In fact, next month, the WTO is scheduled to decide the challenges
    to the steel safeguards applied by the United States in 2002, after
    nearly four years of record-breaking steel imports. Needless to say,
    many of us in Congress will be watching those cases very closely.
                Intellectual Property and Access to Medicines
        Another issue where the Administration has relinquished a
    leadership role is on the vital issue of protecting pharmaceutical
    patents while ensuring access to medicines for the world's poorest
    people. Here, the Wall Street Journal recently reported that the
    Administration engaged in a post-election flip-flop in policy under
    pressure from the pharmaceuticals industry, thereby stalling progress
    on an issue so vital to people all over the world, and setting up the
    United States as the main obstacle to agreement in the WTO
    negotiations. Morever, if this dispute remains unresolved into
    September, it is not clear how it might affect the success of the
    broader WTO negotiations--which have the greatest potential to deliver
    for the U.S. economy.
                LUnnecessary Secrecy--Failure to Release Texts of Chile and
                Singa- pore Agreements
        The Administration has created unnecessary problems for itself in
    other areas, as well. This Administration's penchant for secrecy is
    well known in other contexts, but now it threatens to poison the water
    in the trade arena, as well. To date, the Administration has failed to
    release to the public the texts of the Chile and Singapore FTAs. Here,
    the Administration has broken with the precedents of the NAFTA and
    other agreements--bipartisan precedents set by previous
    Administrations.
        This unnecessary secrecy has made it difficult for Members of the
    advisory committees and Congress to do their jobs. Moreover, it
    undermines a fundamental purpose of the 90-day statutory lay-over
    period. One of the primary reasons for the 90-day notification period
    is to ensure a broad consultation process about the agreement itself--
    not only with Congress and cleared advisors--but with the public at
    large. Once the agreement is signed, that opportunity is extinguished,
    leaving the public to evaluate only the question of implementing
    legislation.
        Finally, restricting the availability of the texts runs contrary to
    common sense. It creates a significant risk of rumor, misinformation
    and suspicion.
        So far, 28 days have gone by--fully a third of the period, advisory
    committee reports are essentially completed and due to be submitted
    later this week or early next week, and the texts are still not
    publicly available. Two weeks ago, the Democratic House Members of the
    COG sent the President a letter urging the immediate release of the
    texts. Just yesterday, we received a response from you to that letter,
    in which you stated that you ``anticipate'' that the Administration
    will make the text of the Singapore agreement available to the public
    in early March, and the text of the Chile agreement in late March or
    early April.
        We are pleased with this apparent progress at moving up the release
    date, but the letters seem to raise as many questions as they answer.
    Why is the text of the Chile Agreement, which was completed about a
    month earlier, not going to be made available until about a month after
    the Singapore text? And, it is notable that even under the new
    anticipated scenario, neither text, it appears, will be available when
    the advisory committee reports are submitted this week or next.
                FTAs
        A strategy of pursuing free trade agreements can be useful for
    opening markets to American exporters, addressing issues that are more
    difficult to handle in multilateral negotiations, even keeping the
    pressure on those negotiations to conclude. However, there has to be a
    clear and publicly-stated strategy consistent with maximizing the
    economic benefits to American workers, farmers and businesses of the
    Administration's and particularly, USTR's limited resources.
        To date, the Administration's announced potpourri of FTA candidates
    does not reflect a clear strategy and raises as many questions as it
    answers.
        It is no wonder, then, that the Chamber of Commerce--normally an
    unfailing ally of the USTR--has begun to question the Administration's
    priorities in determining FTA partners. And there is good reason to
    raise questions. The criteria for allocating the scarce trade
    negotiating resources of the U.S. government does not seem to place
    much emphasis on giving U.S. workers, businesses and farmers the most
    bang for our buck. The combined trade covered by all of the new FTAs
    announced by this Administration--CAFTA, SACU, Australia, and Morocco--
    is only a little over 2 percent of total U.S. trade. Even if we were to
    include the Chile and Singapore agreements, the total would still only
    be about 3.5 percent. Certainly, no one would deny that there are some
    commercial benefits that will flow from these agreements; the question
    is whether and where those benefits fit into the overall priorities of
    trade negotiations and whether, indeed, they will be effective in
    pioneering answers to issues that have proven difficult for the largest
    multilateral areas, including core labor and environmental standards.
        Finally, while all these other matters are pursued, a number of
    problems go unattended. For example, U.S. semiconductor companies in
    China are facing discriminatory taxes. In short, China is
    discriminating against U.S. high tech companies, harming those
    companies and their workers, and so far USTR has not stopped it.
                The Way Forward
        What we need, as globalization moves forward, is a globalization of
    American trade policy within our own borders. In this era of inexorably
    expanding trade, we have no choice but to build a broad-based,
    bipartisan coalition. A trade policy that in fact will tackle the tough
    issues--agricultural reforms, strong intellectual property protections
    and access to medicines--can ultimately be successful only if it is
    based on such a foundation of support in Congress and in our country.
        We have readily within our grasp exactly that kind of strong
    coalition of internationally-minded Members of Congress. As recently as
    2000, a real coalition came together to pass China PNTR, the African
    Growth and Opportunity Act and the CBI enhancement legislation with
    broad bipartisan support.
        We can do that again. Hopefully, the Chile and Singapore agreements
    do not become another polarized and partisan fight.
        The key ingredients of a broad-based approach are a consistent
    policy foundation and ensuring that U.S. policy shapes trade in ways
    that maximize its benefits and minimize its drawbacks.
        The following are some suggested building blocks for that kind of
    an approach.
        FSC. First, on the FSC, Mr. Rangel has already laid out an approach
    to domestic legislation and international negotiations that can garner
    broad support in both parties in the House and Senate, and in the
    business and labor communities.
        Russia PNTR. Second, we should provide immediate Permanent Normal
    Trade Relations (PNTR) status to Russia as Mr. Rangel and I, along with
    Senator Baucus, have proposed. Our legislation, which we expect to
    introduce next week, will also ensure a meaningful role for Congress in
    negotiations to bring Russia into the World Trade Organization (WTO).
        Drug Patents and Access to Medicines. Third, on the subject of
    pharmaceutical patents and access to vital medicines, a number of us--
    Mr. Rangel, Mr. Matsui, Mr. Moran and I and others--have proposed an
    approach that both safeguards our intellectual property and promotes
    access. We believe that coverage should be broadened to allow
    developing countries that lack manufacturing capabilities to address
    effectively serious public health problems--and not only the infectious
    epidemics that have now been identified.
        FTAs--Central American FTA. Fourth, when it comes to negotiating
    free trade agreements, U.S. policy should have two cornerstones. First,
    the United States should not take a ``cookie-cutter'' approach to FTAs.
    With regard to all commercial issues, agreements should be negotiated
    on their own merits depending on the circumstances of a particular
    country or set of countries on issues ranging from agricultural
    subsidies, to service sector regulations, and IPR standards. In the
    case of the CAFTA, a key issue of concern that Mr. Rangel and I have
    already flagged is the question of labor standards enforcement in CAFTA
    countries, and the adequacy (or lack thereof) of the Chile/Singapore
    approach in that context.
        Second, underlying each decision to negotiate--or not negotiate--
    there must be a strong economic rationale particularly in light of the
    resource constraints faced by USTR. No one would suggest that the
    economic rationale is ever the sole reason for pursuing an agreement,
    but it must be the overriding rationale. In the case of the CAFTA, as
    Mr. Rangel and I have already stated, it is difficult given the
    importance of countries like the Dominican Republic to see the
    rationale for departing from the 20-year tradition of developing trade
    and commercial relationships throughout the Caribbean, rather than
    hand-picking a few countries with which to negotiate further
    agreements.
        Vietnam ``Quota-Plus'' Textiles Agreement. Fifth, on the Vietnam
    bilateral textiles agreement, we have proposed a ``quota-plus''
    approach that both promotes additional access to the U.S. and
    implementation of core labor standards in Vietnam. We were very
    concerned to learn that USTR was not intent on negotiating such a
    provision when your office opened negotiations on a textile and apparel
    agreement with the Government of Vietnam last week. We understand that
    those negotiations did not reach agreement. We very much hope you will
    include a positive incentives labor provision in that agreement--what
    we call a ``quota-plus'' agreement.
        As we have discussed, some aspects of the Cambodia model will need
    to be modified to reflect the differences between Vietnam and Cambodia,
    including the size of their textile and apparel sectors and forms of
    government. However, the overall approach has great merit and would be
    an important building block.

    Conclusion

        In conclusion, the basic task before this Administration and this
    Committee was not to ``re-establish U.S. trade leadership around the
    globe'' as stated in Ambassador Zoellick's testimony. It is, instead,
    to re-establish a broad bi-partisan coalition around U.S. trade policy
    from which we can truly lead.

        Chairman THOMAS. I thank the gentleman. Apparently, a
    majority of the Committee greets you, Mr. Ambassador, and your
    written statement will be made a part of the record, and you
    can address us in any way you see fit.

    STATEMENT OF THE HONORABLE ROBERT B. ZOELLICK, AMBASSADOR, U.S.
                          TRADE REPRESENTATIVE

        Mr. ZOELLICK. Thank you, Mr. Chairman and Mr. Rangel, who
    was here just a minute ago, and Chairman Crane and Mr. Levin. I
    prepared a rather lengthy statement, so I will try to create a
    slightly more user-friendly overview to take you through some
    of the topics today. So, I think you all have a little handout
    in front of you.
        Just to review where we are, from the start of the
    Administration our focus has been on trying to promote freer
    trade by moving on multiple fronts: globally, regionally--and
    that is primarily the Western Hemisphere--and also through
    small bilateral or regional agreements. I think what moving on
    multiple fronts has enabled us to do is to take the fact that
    the United States starts with about 25 percent of the world's
    economy and leverage it.
        It also means that we don't allow any one country to block
    us, so if we are only in the WTO negotiations and 1 out of 144
    decides to stop us, we can keep moving. Frankly, it also allows
    us to set the pace instead of being reactive.
        So, it is my view, and certainly the view of many people
    around the world, that over the past 2 years we have regained
    momentum on trade at home and abroad, and that U.S. leadership
    is recognized and appreciated around the world.
        We have also been able to do this in a way that broadens
    the message because we have connected trade to some other
    objectives, not only global growth but development, expansion
    of the rule of law, open societies, and indeed the values that
    are at the heart of our country and our political system.
        We have also tried to connect trade to the broader realm of
    security in the world after 9/11. I certainly would never argue
    that poverty is the cause of terrorism. If you look at the
    background of most of the terrorists, frankly, they are not
    from poor families, and it is an insult to millions of poor
    people around the world that don't turn to terrorism. There is
    no doubt, if you have been in Indonesia or you have been in
    Sub-Saharan Africa, that you see that broken societies create
    the roots of problems because in those societies people that
    focus on destruction as opposed to creation and want to close
    as opposed to open find fertile ground. So, part of our longer
    term security campaign is to create opportunity and prosperity.
        In terms of what we have done over the past 2 years, I
    really want to start by thanking the Chairman and many of you
    on this Committee for the hard work done over the past couple
    years to get the Trade Act passed. It not only restored
    America's negotiating power after an 8-year lapse, but we
    managed to extend some preferential trade agreements that came
    at a critical time, given the world economy: the Andean Trade
    Preference Act, which we expanded; AGOA II, and for those of
    you--the Chairman led a delegation to Mauritius in Africa where
    we met with some 35 Sub-Saharan African countries. You could
    see the fact that the Congress took their considerations into
    account and passed AGOA II amendments to be a very important
    sign. The expansion of GSP, the Generalized System of
    Preferences, for some 140 developing economies; and also, I
    think very importantly, a trade adjustment assistance package
    to help American workers through the adjustment; the launch of
    the Doha Development Agenda, reversing the failure in Seattle
    in 1999; completing the negotiations, which were not done, in
    China and Taiwan to bring them into the WTO during the course
    of 2001, and moving on to the important implementation agenda;
    and moving forward the FTAA into concrete negotiations.
        Steel safeguards, which I know are a controversial topic,
    but I think has given a breathing space for the industry. We
    have now seen some of the restructuring that we hoped would
    start to occur to move the industry back to a competitive
    posture.
        Passing the Jordan Free Trade Agreement; passing the
    Vietnam bilateral trade agreement; completing the Singapore and
    Chile FTAs; and launching a series of other FTAs.
        Now, let me just review where we are in these key parts. In
    the WTO, the Doha Development Agenda, this was a negotiation we
    launched in November of 2001. As Mr. Levin said, he was with us
    there, and I also appreciated that at some key points I had an
    opportunity to consult with the Chairman on things as we were
    putting together the mandate.
        This involves 144 participants around the world. Our next
    key meeting will be in Cancun in September, where we will have
    all the countries come back together, and our target date for
    completion is January 2005.
        With your help, the United States has tried to set the pace
    by focusing on the heart of the agenda, and that is market
    access in agricultural goods and services--the meat of what
    trade negotiations are about.
        You see on the next page I have just highlighted the key
    elements of our agriculture proposal: first, to eliminate
    agricultural export subsidies. I have noted in the recent press
    that President Chirac of France has suggested that maybe it
    would be a good idea to eliminate them for Africa, and we urged
    him to expand his horizons beyond the hedge rows and see all of
    the world having the elimination of export subsidies, helping
    the commission have more ability to negotiate what is an
    important area for the WTO.
        We have also proposed a drastic reduction in agricultural
    tariffs that would cut the average agricultural tariff from 60
    to 15 percent and to cut trade-distorting domestic support by
    about $100 billion, and an important part of this is removing
    much of the differential you have between the European subsidy
    level, which is about 3 times higher than the U.S. subsidy
    level.
        On consumer and industrial goods, we propose that we cut
    all tariffs at 5 percent or below to 0 by the year 2010. That
    would open up three quarters of the trade for the United
    States, Europe, and Japan and make it tariff-free. That is
    important to our industrial and business sectors. It is also
    important to a lot of the developing countries.
        We would cut all other tariffs to 8 percent by 2010 and
    eliminate them by 2015. We also proposed quicker zero-for-zero
    negotiations for key export sectors.
        Now, there is no doubt that this is a bold proposal. Not
    everybody is ready to go this far. It is our strategy to try to
    set the boundaries and push for liberalization and demonstrate
    that the United States is willing to cut if others do.
        The next page also talks about an area that I think needs
    increasing attention, which is services liberalization. Today,
    about two-thirds of America's GDP is represented by services
    and about 80 percent of employees in America are in service
    industries. It is not only our country. In East Asia and Latin
    America, about 50 percent of their economies are in the service
    industries, but it only represents about 20 percent of world
    trade.
        Now, you have actually seen that this is an important area
    for the trading system because Ralph Nader's organization just
    started out this week attacking the services trade. So, it must
    be something that has promise for opening markets.
        Now, why did they attack it? One thing they said is the
    United States is trying to push privatization around the world.
    False charge. The United States has not insisted that countries
    privatize. If they do privatize, however, we hope that U.S.
    firms have the same opportunities that others have.
        We have been accused about trying to interfere with health
    and safety regulation. Again, false charge. Not any of our
    proposals interfere with health and safety regulation, and
    instead what we have suggested is, if there are fields like
    private education where American university education leads the
    world, that people open up opportunity for more competition in
    the private sector, then we should be part of it. It is the
    same with other areas, as you can see here.
        What is important about the services agenda is that it is
    not just a North-North trade or just a North-South trade. This
    is an area where you are finding a lot of developing countries
    find that it is critical to develop their infrastructure. It is
    critical for business like tourism services. It is critical for
    education to upgrade the learning levels of their population.
    So, it is an area that I think will become increasingly
    important.
        The next area is the regional initiatives, and here the key
    one is the FTAA. This involves 34 countries in the Western
    Hemisphere. Our target date for completion is January 2005. We
    are now moving to the key phase, with the United States and
    Brazil being the co-Chairs, the two biggest economies in the
    hemisphere other than our North American partners. We now are
    going to the concrete level of making concrete offers on
    agriculture, goods, services, investment, which we just did in
    February. Again, we tried to set the pace. The United States
    proposed that in the first year 65 percent of our goods market
    would be open to others and 56 percent of our agricultural
    market. We are starting to get the responses from other
    countries. Some are cautious. There is no doubt there is hard
    bargaining ahead. The next ministerial meeting will be in the
    United States, in Miami, in November of this year.
        Then the bilateral initiatives, and I get the question a
    lot, and perhaps Mr. Levin is raising this, too. Why do we
    pursue bilateral initiatives? So, I tried to list some of the
    reasons here for you.
        One, it levels the playing field for the United States.
    Keep in mind Europe has 30 of these agreements. The United
    States just has Canada, Mexico, Israel, and now Jordan. So,
    when we do a free trade agreement with Chile, we are catching
    up with the EU and Canada that are already on their way to
    reducing their barriers.
        Second, it creates a competitive dynamic to liberalize.
    Keep in mind if we only operate in the WTO, if one country
    decides to get up on the wrong side of the bed and slow down
    the negotiations, we are stuck. I don't want to be stuck. I
    don't want to give anybody a veto over U.S. trade policy. So, I
    want to be in a position to say we are moving forward in each
    of these areas aggressively. If somebody else isn't ready to
    move, catch up when you can because we are going to keep going.
        Then we found another effect, which is that one of the most
    striking aspects some of you encountered when you were with us
    in Africa was the AGOA process and our discussion of free trade
    with the Southern African Customs Union has led other African
    countries to say: What reforms do we need to make to be able to
    move toward trade liberalization with the United States?
        We can also use these agreements to connect to sectoral
    reforms. For example, in our Morocco Free Trade Agreement, we
    are working with the World Bank to try to reform the
    agriculture sector in Morocco. It applies to us, too. If we can
    cut subsidies from Europe and Japan, then maybe we can also cut
    some of our farm subsidies and we can reform our sector.
        It encourages regional integration and investment, and
    here, if you look closely at the Central American case or the
    Southern African case, in the case of Southern Africa, keep in
    mind this agreement doesn't only deal with Southern Africa. It
    deals with Botswana, Namibia, Lesotho, and Swaziland. Well,
    Botswana, for example, is a very well-run economy, and the
    leadership there has had a multi-party democracy for some 40
    years. It is only about 1.8 million people. They are not going
    to make it on their own. They have got to be able to connect to
    other economies, the same with Lesotho, the same with Namibia.
        It is also true in Central America. We have got for the
    first time five countries that have had very different
    political traditions trying to work together to unite their
    economies all because the United States is offering them a goal
    of liberalization with the United States. I took note of the
    point that Mr. Rangel made, and I know he has written me about
    this in terms of some further connection. This is an idea that
    we can discuss, I have discussed with my negotiators. As we
    have talked about, we have got some issues we want to move the
    Dominican Republic on. You have tried to help us with this.
    They are moving. So, I think we try to look at these ideas,
    and, frankly, I think you and others have raised the same point
    about Panama.
        Part of this, it is also true--we have talked about this
    with Southern Africa. We don't want it to hurt our negotiations
    with the Southern African Customs Union or hurt AGOA, so we
    need to find a way that pulls along the most advanced but also
    gives the opportunity of others to benefit from it. That is a
    good point.
        To help cement economic and political reforms, and here,
    again, Central America--many of you have known the history of
    this in terms of violence, fragile democracies. Part of what we
    are helping is to develop open societies. It is true with the
    Southern African Customs Union, too, where four of the
    countries are democracies. Swaziland has problems. There is no
    doubt about it. The best way to get at Swaziland's problems is
    to try to work with the other countries in Southern Africa to
    improve them.
        It also creates allies for us with the WTO and the FTAA
    talks, because as we work closely with these other countries,
    we learn their interests and we develop ways to cooperate.
        Frankly, these other agreements break new ground and set
    higher standards. Many of you have an interest in the digital
    economy. The Chile and Singapore agreements, which all of you
    have access to on the Web site and you and your staff saw the
    documents before the negotiations and you all have access now,
    as well as the 700 cleared advisers, demonstrate that what we
    did in the digital economy offers some very important
    possibilities for the United States, because this is an area of
    intellectual property (IP) that frankly has moved beyond what
    occurred in the Uruguay round, in services, in e-commerce, and
    indeed in environment and labor, where this Committee has, I
    know, struggled about how to move ahead in environment and
    labor and trade, and now for the first time we have got some
    serious environment and labor provisions that I think can fill
    a pattern for the future.
        Now, on the bilateral initiatives, just to review where we
    are, with Singapore and Chile we concluded them in the fourth
    quarter of 2002. We hope for consideration in 2003. In essence,
    with Chile--I will be happy to go into this in more detail. The
    key part is it opens up a level playing field from the start.
    About 85 percent of the goods are tariff-free from duty day 1;
    75 percent of U.S. agriculture exports will have zero duties
    within 4 years. We have removed the price band system that has
    plagued a lot of our agricultural exporters, and this again
    shows an interesting development in these smaller agreements.
        We are basically getting the Chileans to accept U.S.
    standards for meat inspection and dairy, which is an
    increasingly important area with trade. It is not just the
    tariff barriers. It is issues like this.
        Equally important, this free trade agreement with Chile--
    and I was somewhat surprised by the effect of this. It sent a
    very important message throughout Latin America because,
    frankly, some people thought we would never get this thing
    done. Now, when they realize that we can get it done and we
    hope with congressional passage, it creates incentives
    elsewhere.
        With Singapore, we had some particular issues related to
    government-linked corporations. They have corporations that
    have special government ties. We wanted to make sure we had
    open competition. It is a major port, and we have some special
    provisions dealing with customs transparency to combat illegal
    transshipment. We also have some very important provisions in
    terms of express delivery and biotech patents. In both these
    agreements, we have set a high standard for services. We have
    what is called the negative list, which means everything is
    covered unless you remove it, which is not the way it is done
    in the WTO.
        In the area of regulatory transparency, we have got some
    breakthrough possibilities that basically have these countries
    accepting the key principles of the Administrative Procedures
    Act in terms of notice for regulations and comment and so on
    and so forth.
        Moving forward, we have launched the Central America
    negotiations. Mr. Brady has been helpful in terms of forming
    together a caucus on this. We are going to try to get this done
    over the course of 2003. There are negotiations going on right
    now, and Mr. Portman's city of Cincinnati was kind enough to
    host us. This is the area where we will follow up with Mr.
    Rangel on the docking issues.
        In Morocco, we launched that in January of 2003. We hope to
    get that done by the end of this year, building on the
    agreements we have had. Mr. English has been very helpful in
    forming together a group to support that as well, and I believe
    Mr. Tanner is also a part of that effort.
        Southern Africa, we have launched in January of this year.
    Those of you who took the trip to Africa saw its importance.
    This one I think is going to take a little longer because we
    are going to work with these five countries together, but we
    hope to try to get it done by the end of 2004.
        Australia, again, we launched in February. Here a key issue
    is the sanitary and phytosanitary issues on agriculture which
    we continue to work on. Again, I hope we get this done in 2004.
        Just a quick sense of a couple other issues. Clearly, we
    have a lot of follow-through on the China and Taiwan WTO
    accession. I was in China last week. It is a country of
    enormous potential, enormous change, but also enormous work to
    do, and this is an area where I think we can send important
    messages together.
        Russia's accession to the WTO is an item that moves ahead
    with fits and starts. The most recent efforts of Russia to
    block some of our agricultural products to me are not a
    positive move. It is an area where the gains can be great if we
    can be successful.
        The enforcement actions of a host of topics in WTO and
    NAFTA, compliance with WTO rulings and trade retaliation. Some
    of you have covered some of this in your opening statement. My
    statement covers it. I am happy to answer more questions.
        I will just make this general point. During the Uruguay
    round negotiations, this Committee and the Congress urged the
    creation of the dispute settlement system, and it does serve
    U.S. national interests because we are the biggest trading
    power in the world and, frankly, a lot of these cases and the
    disciplines benefit us. Sometimes we lose, and when we lose,
    frankly, we have got to figure out a way to come into
    compliance. I am not only talking about the big ones that some
    of you mentioned, like FSC, but there are some other issues
    that have been hanging around for a few years, and, frankly, it
    doesn't help the United States to be a scofflaw. We have got to
    figure out a way to try to get these done.
        Small business is an area that I think has an increasing
    opportunity to be linked with trade. Just to take the CAFTA,
    the Central American negotiations, it turns out that 78 percent
    of America's exporters to Central America are small- and
    medium-sized enterprises, and they represent about half the
    value. I now have a detailee from the Small Business
    Administration on my staff to try to help make sure we
    represent those interests and know about the goals of the small
    business community.
        Trade capacity building for developing countries. A lot of
    you have helped us on this. I have talked with Mr. Rangel about
    this in both Central America and Africa, and I want to thank
    Mr. Kolbe. The Appropriations Committee has been very helpful.
        We put together about $638 million a year now on trade
    capacity building, and it is money well spent because it helps
    these countries to be able to take part in the negotiations and
    implement it. To me it is not a question of trade or aid. It is
    a question of how you link trade and aid together.
        Other legislative items, those of you that were in South
    Africa certainly saw the interest in some additions for AGOA, a
    possible AGOA III. Secretary Powell and I sent a letter up
    about Laos for normal trade relations. It is the only least
    developed country without normal trade relations, and it is the
    only one we have normal diplomatic relations with that we don't
    have normal trade relations.
        Environment and trade and labor conditions and trade, I
    know this will be a topic we continue to discuss. I am very
    proud we now have these in our agreements. We are working on
    cooperative efforts. We have actually got some of the non-
    government organizations (NGOs) helping us now in terms of the
    follow-through on these efforts. We are also trying to link
    with the work of multilateral development banks. So, again, I
    think we can connect trade to these issues in a way that isn't
    protectionist if we do it right.
        HIV/AIDS and access to medicines and funding. We can talk
    more if you want about the trade related intellectual property
    rights (TRIPS) and medicines issue. I assure you I find it a
    frustrating one, too, as I mentioned to some of the Members. I
    think part of the problem here is there is a big gap of trust
    between some of the poorer countries and some of the companies
    who are afraid that some of their patents will be taken by some
    of the not-poor countries, and that is the gap we need to try
    to close here.
        I also think the fact that we have made clear that this
    does not refer to HIV/AIDS, tuberculosis, malaria through our
    Doha first position, second, the moratorium we put forward, and
    the President's proposal for $15 billion of support for HIV/
    AIDS.
        Finally, on conflict diamonds, this is one that Members of
    this Committee but also Chairman Wolf have had a strong
    interest in. Just to bring you up to date, the Kimberley
    process did come to an agreement on this. We agreed with all
    the other countries in the WTO for the appropriate waiver. We
    also got a UN resolution to be of help, and I again appreciate
    the Chair's interest in trying to push this forward and move
    the appropriate legislation to close this out.
        Finally, I just want to thank all of you. I know we have
    different interests on this and we have different views about
    history. We will let that be decided by historians. I think
    over the past couple years we have been able to address a lot
    of the issues people have raised. I have certainly benefited
    from the insights of the Committee. We may not always agree,
    but I have certainly learned from the exchange, and we have
    been able to solve some of these problems.
        I remember when I first started out and the minority said,
    ``Mr. Zoellick, the three things you have to get done are
    Jordan, Vietnam, and a steel 201.'' I did those. Then they
    said, ``Well, now we have got to get environment and labor
    done.'' Well, we did that. Now Mr. Levin, always keeping my
    feet to the fire, has got a new set, but that is the way the
    process goes. So, we will work with you.
        Thank you.
        [The prepared statement of Mr. Zoellick follows:]
     Statement of the Honorable Robert B. Zoellick, Ambassador, U.S. Trade
                                 Representative

    Mr. Chairman, Representative Rangel, and Members of the Committee:

        Thank you for the opportunity to testify today, for your support
    and assistance, and the tremendous work of your staffs during this past
    year. We are very grateful for your significant effort to pass the
    Trade Act of 2002, including Trade Promotion Authority (TPA). We
    greatly appreciate your leadership, Mr. Chairman, and value our
    partnership with the Congress on trade matters.
        Over the past year, working together, we have rebuilt America's
    leadership on trade. We are now pressing aggressively to secure the
    benefits of open markets for American families, farmers, workers,
    consumers, and businesses. President Bush is advancing, in close
    association with the Congress, an activist strategy ``to ignite a new
    era of global economic growth through a world trading system that is
    dramatically more open and more free.''
        A key achievement this past year was the renewal of the Executive-
    Congressional partnership embodied in TPA. With that authority restored
    after a lapse of eight years, the Administration has begun to fulfill
    the vision of open markets and development articulated at the launch of
    new global trade negotiations in Doha, Qatar, in November 2001. The
    United States has submitted far-reaching proposals to the World Trade
    Organization (WTO), including plans to remove all tariffs on
    manufactured goods, open agriculture and services markets, and address
    the special needs of poorer developing countries.
        Consulting closely with Congress, the Administration capped the
    year by completing Free Trade Agreement (FTA) negotiations with Chile
    and Singapore, which, when implemented, will open new markets for
    American exporters while expanding choice and value for American
    consumers. By lowering prices through imports and increasing incomes
    through trade, America's newest trade agreements will build on the
    success of the North America Free Trade Agreement (NAFTA) and the
    Uruguay Round, which together already provide the average American
    family of four with benefits amounting to $1,300 to $2,000--each and
    every year.
        As President Bush has noted, ``America is back in the business of
    promoting open trade to build our prosperity and to spur economic
    growth.''
        The Bush Administration looks forward to maintaining a close
    partnership with Congress in 2003 as we lay a firm foundation for a
    more prosperous America by passing the free trade agreements with Chile
    and Singapore; build upon our proposals to open markets in global trade
    talks; advance negotiations on the Free Trade Area of the Americas
    (FTAA); negotiate new FTAs with the five countries of the Central
    American Common Market, Australia, Morocco, and the five countries of
    the Southern African Customs Union; enforce U.S. trade laws; and
    monitor and press China's and Taiwan's compliance with their WTO
    obligations.

    Realizing the Free Trade Vision

        Following World War II, America successfully employed trade to help
    shape a positive bipartisan agenda of growth, openness, and security.
    With the end of the Cold War, however, the Executive-Congressional
    partnership that fueled that historic progress lapsed, weakening U.S.
    trade leadership.
        To lead globally, President Bush recognized that he had to reverse
    the retreat at home. He worked successfully with Congress to enact the
    Trade Act of 2002. This Act included Trade Promotion Authority (TPA),
    which re-established the authority necessary to credibly negotiate
    comprehensive trade agreements by ensuring that they will be approved
    or rejected, but not amended.
        The Trade Act of 2002, however, included more than just TPA. As the
    legislation moved through Congress, pro-trade Republicans and Democrats
    worked closely with the Administration to incorporate trade-related
    environmental and labor issues, while simultaneously addressing
    concerns about sovereignty and protectionism. The Act nearly tripled
    funding for the Trade Adjustment Assistance program--from $424 million
    in 2001 to $1.3 billion in 2003--to provide income support, health
    care, and training to Americans who need to acquire new skills or
    require temporary assistance due to job transitions in the
    international economy. The Trade Act also included a large, immediate
    down payment on open trade for the world's poorest nations, cutting
    tariffs to zero for an estimated $20 billion in American imports from
    the developing world by renewing and expanding the Andean Trade
    Preference Act, the African Growth and Opportunity Act, the Generalized
    System of Preferences, and the Caribbean Basin Trade Preferences Act.
        The Bush Administration is committed to active consultations with
    Congress to ensure that America's negotiating objectives draw upon the
    views of its elected representatives, and that they have regular
    opportunities to provide advice throughout the negotiating process. The
    Trade Act of 2002 established a new Congressional Oversight Group with
    bipartisan representation from all the committees with jurisdiction
    over legislation affecting trade. The Administration will continue to
    consult regularly with Congress on U.S. trade policy, both through the
    Oversight Group and through the committees of jurisdiction.
        Even as it has rebuilt support for trade at home, this
    Administration has been working abroad to open markets on all levels:
    globally, regionally, and bilaterally. By moving forward on multiple
    fronts, the United States is exerting its leverage for openness,
    creating a new competition in liberalization, targeting the needs of
    poorer developing countries, and creating a fresh political dynamic by
    putting free trade on a global offensive.
        Coming to office in the wake of the WTO's 1999 Seattle debacle, the
    Bush Administration recognized the importance of launching new global
    trade negotiations to open markets and spur growth and development. Our
    leadership--in conjunction with the European Union, many developing
    countries, and others--was instrumental in launching the Doha
    Development Agenda (DDA), against long odds. The Administration also
    played a key role in enlarging and strengthening the WTO by adding
    China and Taiwan to its ranks. By adding these important economies to
    the WTO, we are helping to ensure that China and Taiwan commit to a
    rules-based, open system of trade that will expand opportunities for
    Americans in these markets. Since 1995, the United States has helped
    add 17 new members to the WTO--and efforts are in train to add Russia
    and other nations in the future.
        The United States is committed to the goal of completing the DDA by
    the agreed deadline of 2005. To maximize the likelihood of success, the
    United States is also invigorating a drive for regional and bilateral
    FTAs. These agreements promote and reinforce the powerful links among
    commerce, economic reform, development, and investment, thereby
    strengthening security and the momentum for free and open societies.
    Under NAFTA, U.S. trade with Mexico almost tripled and trade with
    Canada nearly doubled; as important, all three members have become more
    competitive internationally. NAFTA proved definitively that both
    developed and developing countries gain from free-trade partnerships.
    It enabled Mexico to bounce back quickly from its 1994 financial
    crisis, launched the country on the path of becoming a global economic
    competitor, and supported its transformation to a more open democratic
    society.
        In the months following the Congressional grant of TPA, the Bush
    Administration completed FTA negotiations with Chile and Singapore,
    began new FTA negotiations with the five nations of the Central
    American Common Market, and announced FTA negotiations with the five
    countries of the Southern African Customs Union, Morocco, and
    Australia. We pushed forward the negotiations among 34 democracies for
    a Free Trade Area of the Americas and will co-chair this effort with
    Brazil until it is successfully concluded. The United States is once
    again seizing the global initiative on trade.

    Pressing Forward with Global Trade Negotiations

        Since the launching of new global trade negotiations at Doha in
    2001, the United States has offered a series of bold proposals to
    liberalize trade in the three key sectors of the international economy:
    industrial and consumer goods, agriculture, and services. The U.S.
    leadership demonstrated by these proposals has been instrumental in
    maintaining forward momentum in the negotiations and in keeping WTO
    members focused on the core issues of market access.
        Consumer and industrial goods. The U.S. proposal for manufactured
    goods calls for the elimination of all tariffs on these products by
    2015. This was the trade sector first targeted by the founders of the
    General Agreement on Tariffs and Trade in 1947. After more than 50
    years' work, about half the world's trade in goods is now free from
    tariffs. It is time to finish the job.
        The U.S. proposal would level the playing field first by
    harmonizing disparate tariffs at lower levels and then eliminating them
    altogether. We envision this happening in a two-stage process.
        The first phase would take place between 2005 and 2010. During that
    time, WTO members would eliminate all non-agricultural tariffs
    currently at or under 5 percent. This step would completely eliminate
    tariffs on more than three-quarters of imports into the United States,
    the European Union, and Japan in just five years. It would
    significantly boost trade among the major industrialized nations and
    spur developing countries' exports to developed nations.
        During the 2005-2010 period, countries could also eliminate non-
    agricultural tariffs in highly traded goods sectors--such as
    environmental technologies, aircraft, and construction equipment--
    through a series of zero-for-zero initiatives with trade partners that
    are ready to commit to greater levels of openness. In addition, for all
    other duties the United States is proposing a ``Tariff Equalizer''
    formula, which would bring all remaining non-agricultural tariffs down
    to less than 8 percent. In order to achieve greater equity, the highest
    tariffs would fall farther than the lower tariffs.
        The second phase of the U.S. proposal would be carried out between
    2010 and 2015. During those five years, all WTO members would make
    equal annual cuts, until their tariffs on goods are eliminated. With
    zero tariffs, the manufacturing sectors of developing countries could
    compete fairly. The proposal would eliminate the barriers among
    developing countries, which pay 70 percent of their tariffs on
    manufactured goods to one another. By eliminating barriers to the farm
    and manufactured-goods trade, the income of the developing world could
    be boosted by over $500 billion.
        The U.S. proposal for a zero-tariff world is a major tax cut that
    would directly save America's working families more than $18 billion
    per year on the import taxes they currently pay in the form of higher
    prices. The dynamic, pro-business, pro-consumer, and pro-competitive
    effects of slashing tariffs would mean that America's national income
    would increase by $95 billion under the U.S. goods proposal. Together
    with the tax cut from lower tariffs, that would mean an economic gain
    of about $1,600 per year for the average family of four.
        Agriculture. America's farmers are a key to our economic vitality.
    Dollar for dollar we export more wheat than coal, more fruits and
    vegetables than household appliances, more meat than steel, and more
    corn than cosmetics.
        The U.S. goal in the farm negotiations is to harmonize tariffs and
    trade-distorting subsidies while slashing them to much lower levels, on
    a path towards elimination. The last global trade negotiation--the
    Uruguay Round--accepted high and asymmetrical levels of subsidies and
    tariffs just to get them under some control. For example, the Round set
    a cap on the European Union's production-distorting subsidies that was
    three times the size of America's, even though agriculture represents
    about the same proportion of our economies.
        The 2002 U.S. Farm Bill--which authorized up to $123 billion in all
    types of food-stamp, conservation, and farm spending over six years,
    amounts within WTO limits--made clear that the United States will not
    cut agricultural support unilaterally. But America's farmers and many
    agricultural leaders in Congress back our WTO proposal that all nations
    should cut tariffs and harmful subsidies together. The United States
    wants to eliminate the most egregious and distorting agricultural
    payments-export subsidies. We propose cutting global subsidies that
    distort domestic farm production by some $100 billion, slashing our own
    limit almost in half. We would cut the global average farm tariff from
    60 percent to 15 percent, and the American average from 12 percent to 5
    percent. The United States also advocates agreeing on a date for the
    total elimination of agricultural tariffs and distorting subsidies.
        Services. The United States is by far the world's leading exporter
    of services. We have submitted requests to our WTO partners that would
    broaden opportunities for growth and development in this critical
    sector, which is just taking off in the international economy. Services
    represent about two-thirds of the U.S. economy and 80 percent of our
    employment, yet they account for only about 20 percent of world trade.
    Services liberalization would open up new avenues for trade, benefiting
    both the United States and our trading partners. The World Bank has
    pointed out that eliminating services barriers in developing countries
    alone could yield them a $900 billion gain.
        As WTO negotiations have progressed, we are making significant
    progress in a number of other areas covered by the Doha declaration,
    including:
        Capacity Building. The United States is committed to expanding the
    circle of nations that benefit from global trade. We listen to the
    concerns of developing countries and assist in their efforts to expand
    free trade. This past year, we devoted $638 million--more than any
    other single country--to help developing economies build the capacity
    to take part in trade negotiations, implement the rules, and seize
    opportunities. We have also acted in partnership with the Inter-
    American Development Bank and other multilateral institutions to
    provide new capacity-enhancing resources and expertise.
        In addition, the Bush Administration is emphasizing the important
    contributions that small businesses make to the U.S. and global
    economies. Small businesses are a powerful source of jobs and
    innovation at home and an engine of economic development abroad. By
    helping to build bridges between American small businesses and
    potential new trading partners, these enterprises can become an
    integral part of our larger trade capacity building strategy. Working
    with the U.S. Small Business Administration, we have established an
    Office of Small Business Affairs at the Office of the United States
    Trade Representative (USTR) that is charged with insuring that American
    small business concerns are incorporated into our trade policy
    pursuits.
        Intellectual Property. We agreed at Doha that the available
    flexibility in the global intellectual-property rules could be used to
    allow countries to license medicines compulsorily to deal with HIV/
    AIDS, tuberculosis, malaria and other epidemics. We are also committed
    to helping those poor regions and states obtain medicines they cannot
    manufacture locally. To keep faith with our Doha obligations, the
    Administration has issued a pledge: while we pursue a global
    understanding on how these life-saving medicines can best be provided
    to countries that cannot produce the medicines themselves, the United
    States will not challenge in dispute settlement any WTO member that
    uses the compulsory licensing provisions of the TRIPS Agreement to
    export such drugs to a poor country in need. The Administration
    believes we must strike the necessary balance between protecting life-
    saving research and patents and helping those truly needy that face
    infectious epidemics.
        Trade Rules. The international rules that govern unfair trade
    practices should be improved, not weakened. Indeed, the DDA explicitly
    states that any negotiation of trade remedy laws will preserve the
    basic concepts, principles, and effectiveness of existing agreements,
    as well as their instruments and objectives. This clear mandate will
    enable the United States to press for trade remedies to be applied in a
    manner consistent with international obligations. Inappropriate and
    non-transparent application of these laws can damage the legitimate
    commercial interests of U.S. exporters.
        The Environment. Work has progressed well over the past year on the
    DDA's trade and environment agenda. The United States has urged new
    disciplines on harmful fisheries subsidies, prompting discussions in
    the Rules Negotiating Group on the inadequacy of existing rules in
    preventing trade distortion and resource misallocation in this
    important sector. The Bush Administration has stood firm against
    efforts to use so-called non-trade concerns, including using
    unjustified trade-distorting measures under the guise of environmental
    policy, to undermine the agenda for agricultural liberalization. At the
    same time, we helped move discussions forward on increasing market
    access for environmental goods and services in several WTO fora. WTO
    members also began to identify avenues for increasing mutual
    supportiveness of multilateral environmental agreements (MEAs) and the
    WTO, particularly with respect to cooperation and communication between
    these institutions.
        Electronic Commerce. The United States is actively engaged in the
    work program on electronic commerce, now being conducted under the
    auspices of the WTO's General Council. In 2002, two meetings were
    dedicated to e-commerce and focused on classification and fiscal
    implications of electronically transmitted products. As the work
    progresses, the United States will push for a set of objectives to form
    the basis for a positive statement from the WTO about the importance of
    free-trade principles and rules to the development of global e-
    commerce.
        Transparency in Government Procurement and Efficient Customs
    Procedures. The Administration also continues to push for the
    reciprocal removal of discriminatory government procurement practices
    in a wide range of multilateral, regional and bilateral fora, including
    the WTO. The Administration is urging the conclusion of an Agreement on
    Transparency in Government Procurement that would apply to all members
    of the WTO. The United States is also taking part in negotiations on
    new WTO rules to facilitate trade by making procedures at international
    borders more transparent and efficient.
        Labor Issues. The United States has continued to press for
    increased cooperation between the WTO and the International Labor
    Organization (ILO). We charted important progress in 2002: the creation
    of the ILO's World Commission on the Social Dimensions of
    Globalization, which is undertaking a thorough analysis of the
    implications of trade and investment liberalization on employment,
    wages, and workers' rights. We look forward to the Commission's 2003
    report.
        The Administration's commitment to mutually supportive trade and
    labor policies has also benefited greatly from a partnership between
    USTR and the Department of Labor's International Labor Affairs Bureau
    (ILAB). ILAB has directly supported the work of the ILO, focusing
    particularly on promoting the 1998 ILO Declaration on Fundamental
    Principles and Rights at Work and the International Program for the
    Elimination of Child Labor (ILO/IPEC). ILAB is working with the ILO and
    other international organizations to assist countries in implementing
    core labor standards and is also providing technical cooperation to
    strengthen the capacities of developing countries' Labor Ministries to
    implement social safety net programs and combat the spread of HIV/AIDS.
    Realizing that child labor can never be fully eliminated until poverty
    is vanquished, the Administration and ILO/IPEC have focused on the
    eradication of the worst forms of child labor, including bonded or
    forced labor, child prostitution, and work under hazardous conditions.
    We have also bolstered the U.S. trade and labor agenda through ILAB
    analyses of labor laws and the worker rights situation of our trading
    partners.
        Commitment to Progress within the WTO. To help maintain the
    momentum after the Doha agreement, WTO members agreed that Mexico would
    chair the mid-term review of progress at the September 2003 Ministerial
    in Cancun. This meeting will provide WTO members with the opportunity
    to chart a course for the final phase of negotiations. We welcome the
    leadership role that Mexico is playing by hosting this important
    meeting.
        As negotiations progress, the United States will be placing special
    emphasis on a continued effort to ensure the involvement of the poorest
    and least developed nations, in order to assist them in securing the
    benefits of trade and to help keep all WTO members effectively invested
    in the process. In 2002, we reaffirmed the U.S. commitment to the
    principle of special differential treatment for least developed
    countries in order to better integrate them into the global trading
    system, and devoted unprecedented resources to help such countries
    build the capacity to take part in trade negotiations, implement the
    rules, and seize opportunities. We have acted in partnership with the
    Inter-American Development Bank to integrate trade and finance, and we
    are urging the World Bank and the IMF to back their rhetoric on trade
    with resources.

    Monitoring China's and Taiwan's Compliance with WTO Obligations

        In 2001, the United States played a key role in breaking through
    logjams to complete the historic accessions of China (after a 15-year
    effort) and Taiwan (after a 9-year effort) to the WTO. This achievement
    built on the work of four U.S. Administrations and several Congresses.
    To achieve a successful result, we solved many multilateral issues,
    including those relating to agriculture, trading rights, distribution,
    and insurance, while navigating the political sensitivities to enable
    China and Taiwan to join the WTO within 24 hours of one another.
        Throughout 2002, the Bush Administration worked closely with other
    countries, as well as the private sector, to monitor China's and
    Taiwan's compliance with the terms of their WTO membership. On December
    11, 2002--the first anniversary of China's accession to the WTO-USTR
    published a report, pursuant to section 421 of the U.S.-China Relations
    Act of 2000, updating Congress on compliance by China with its WTO
    commitments.
        Overall, during the first year of its WTO membership, China made
    significant progress in implementing its WTO commitments. It gained
    ground by making numerous required systemic changes and by implementing
    specific commitments, such as tariff reductions, the removal of
    numerous non-tariff barriers, and the issuance of regulations to
    increase market access for foreign firms in a variety of services
    sectors. Nevertheless, we have serious concerns about areas where
    implementation has not yet occurred or is inadequate--particularly
    agriculture, intellectual property rights enforcement, and certain
    services sectors.
        An extensive interagency team of experts closely monitors China's
    WTO compliance efforts. This effort is overseen by the Trade Policy
    Staff Committee (TPSC) Subcommittee on China WTO Compliance, which is
    composed of experts from USTR, the Departments of Commerce, State,
    Agriculture, Treasury, and the U.S. Patent and Trademark Office. It
    works closely with State Department economic officers, Foreign
    Commercial Service officers and Market Access and Compliance officers
    from the Commerce Department, Foreign Agricultural Service officers and
    Customs attaches at the U.S. Embassy and Consulates General in China,
    who are active in gathering and analyzing information, maintaining
    regular contacts with U.S. industries operating in China and
    maintaining regular contacts with Chinese government officials at key
    ministries and agencies.
        When confronted with compliance problems in 2002, the
    Administration used all available means to obtain China's full
    cooperation, including intervention at the highest levels of
    government. Throughout the year, USTR worked closely with affected U.S.
    industries on compliance concerns, and utilized bilateral channels
    through multiple agencies to press them. The Administration also
    broadened enforcement efforts by working on China issues with like-
    minded WTO members through the Transitional Review Mechanism and on an
    ad hoc basis. Through these efforts, the Administration made progress
    on a number of fronts. For example, we addressed and continue to work
    on a series of problems arising from China's new biotechnology
    regulations that threatened U.S. soybean exports--$1 billion worth in
    2001--and other commodities. In the services area, the Administration
    successfully pressed China to modify new measures that threatened to
    restrict access by American express delivery firms, and we made
    progress in dealing with the concerns of U.S. insurance companies
    regarding China's use of excessively high capitalization requirements
    and other prudential standards. USTR also established a regular
    dialogue on compliance with China's lead trade agency, MOFTEC, in
    September 2002. This dialogue is designed to bring all relevant Chinese
    ministries and agencies together in one forum to facilitate the
    resolution of outstanding contentious issues.
        Taiwan's accession to the WTO has increased access for a wide range
    of U.S. goods and services, including agricultural exports, during
    2002. However, we continue to track potential compliance problems with
    Taiwan's WTO commitments, while we work to address existing problems
    regarding market access for agriculture goods, intellectual property
    rights protection, and Taiwan's telecommunications services market.
    Throughout the year, the Administration worked closely with U.S.
    industries and other agencies on these compliance and other market
    access concerns. We used all available bilateral channels to press the
    Taiwan authorities to address shortcomings in these areas.
        The Administration will continue this crucial work in 2003, both to
    address unresolved concerns and to tackle any new problems that arise.
    The backing we have received from the Congress--in terms of resources
    and attention--has been and will remain fundamental to the achievement
    of our mission. We will work closely with U.S. businesses, farmers, and
    labor groups--and with China and Taiwan--to address problems and take
    action when necessary.

    Advancing Russia's Accession to the WTO

        The United States has begun a new era in its relations with Russia.
    Whether in the realms of security, foreign policy, or economics,
    President Bush has emphasized the need to move beyond Cold War
    strictures and stereotypes.
        To take another step towards closing out the history books of the
    Cold War, the President has urged the Congress to finally end the
    application of the Jackson-Vanik amendment to Russia. It has been over
    a decade since the unification of Germany in 1990 and the dissolution
    of the Soviet Union in 1991. Furthermore, Russia has been in full
    compliance with Jackson-Vanik's emigration provisions since 1994. As we
    move ahead, the Administration will continue consulting closely with
    various groups on the protection of freedom of religion and other human
    rights in conjunction with this action.
        In 2003, we will continue our intensified effort to negotiate the
    terms of Russia's accession to the WTO on commercially meaningful
    terms. President Putin has made WTO membership and integration into the
    global trading system a priority. We will support Russia as it promotes
    reforms, further establishes the rule of law in the economy, and
    adheres to WTO commitments that support a more open economy. This
    effort needs to include action by the Duma to establish a fully
    effective legal infrastructure for a market economy.
        To achieve a successful WTO accession, Russia must abide by
    multilateral trade rules, and the United States and 144 other member
    nations will insist on that course as talks proceed. Working closely
    with the Congress, the Administration will stress the need for Russia
    to offer fair market access in important U.S. export sectors--in
    agriculture and financial services, for example--and to adhere to
    international standards in areas such as food safety. Unfortunately,
    Russia's actions on poultry and other meats have sent a negative signal
    about the seriousness of its commitment to join the WTO. If Russia
    continues down this path, it risks losing the benefits of WTO
    membership--and even current levels of market access for its exports.

    LAdvancing Hemispheric Trade Liberalization: The Free Trade Area of the
            Americas

        On the regional front, the United States has been pressing ahead to
    create the largest free trade zone in history, covering 800 million
    people and stretching from Alaska to Tierra del Fuego: the Free Trade
    Area of the Americas (FTAA). This endeavor will be trying and
    difficult, yet when completed it will be historic--a fulfillment of a
    U.S. vision dating to the 19th Century.
        In November 2002 in Quito, Ecuador, we energized the FTAA
    negotiations by agreeing on a firm schedule and deadlines for specific
    offers to cut tariffs and reduce barriers. Ministers recommitted
    themselves to the 2005 deadline for completion of negotiations,
    delivered new instructions to negotiating groups, released an updated
    draft negotiating text, agreed to tariff reductions from applied rates
    rather than WTO bound rates, and launched a Hemispheric Cooperation
    Program to assist in building trade capacity for our poorer partners.
    Upon the close of the Quito Ministerial, the United States and Brazil
    assumed co-chairmanship of the FTAA process, providing an opportunity
    for cooperation with a key partner and economic power as the pace of
    negotiations accelerates. This month, the United States advanced bold
    market access proposals for manufactured and consumer goods,
    agriculture, services, government procurement, and investment. We will
    also host the next Ministerial meeting in Miami in November 2003.
        President Bush, like his counterparts throughout the Americas,
    knows that the FTAA will be crucial in our quest to build a prosperous
    and secure hemisphere. Free trade offers the first and best hope of
    creating the economic growth necessary to alleviate endemic poverty and
    raise living standards throughout the Americas. The scope of our
    endeavor is grand: The FTAA will be the largest free market in the
    world, with a combined gross domestic product of over $13 trillion.
        Hemispheric openness is important in its own right, but it will
    also have a multiplier effect on growth by encouraging fuller
    participation by those countries in the Americas that have been
    bystanders in the global trading system. FTAA negotiators are
    developing provisions that will provide trade capacity building and
    technical assistance to smaller economies in the Americas, especially
    in the Caribbean. Our FTAA offers also take into account the special
    circumstances of these small island nations by building on existing
    patterns of preferential openness.
        Fundamental freedoms and human rights are core principles of the
    Summit of the Americas process, as reiterated in Quito this year. The
    FTAA will strengthen democracy throughout the Hemisphere--a proposition
    that is not just theory, but fact. Time and time again, the world has
    witnessed the evolution from open markets to open political systems,
    from South Korea to Taiwan to Mexico. Free trade will likewise bolster
    young democracies in the Americas and the Caribbean.
        During the Quito summit, the governments of the Americas also
    affirmed their commitment to the observance of internationally
    recognized labor standards. This echoed the agreement by the
    hemisphere's heads of state at the Third Summit of the Americas to
    ``promote compliance with internationally recognized core labor
    standards. The Inter-American Conference of Ministers of Labor (IACML)
    is responsible for implementing the labor-related mandates of the Third
    Summit of the Americas and represents a parallel process for addressing
    the labor implications of economic integration. The Department of Labor
    represents the United States in the IACML and co-chairs the working
    group charged with examining the labor dimensions of the Summit of the
    Americas process.
        As we continue building support for the FTAA, it will be important
    to point to the successful record of America's first regional trade
    agreement, the decade-old NAFTA. Throughout the months ahead, we will
    continue to publicize NAFTA's substantial benefits and consider
    additional ways to deepen integration throughout the Americas. NAFTA
    has been a case study in globalization along a 2,000-mile border; it
    demonstrates how free trade between developed and developing countries
    can boost prosperity, economic stability, productive integration, and
    the development of civil society.

    Pressing Other Regional and Bilateral Agreements

        Whether the cause is democracy, expanding commercial opportunity,
    security, economic integration or free trade, advocates of reform often
    need to move towards a broad goal step by step--working with willing
    partners, building coalitions, and gradually expanding the circle of
    cooperation. Just as modern business markets rely on the integration of
    networks, we need a web of mutually reinforcing regional and bilateral
    trade agreements to meet diverse commercial, economic, developmental
    and political challenges.
        In 2002, the Bush Administration completed free trade negotiations
    with Chile and Singapore. Both of these agreements offer increased
    opportunities for U.S. businesses, farmers, and workers and send a
    message to the world that the United States will embrace closer ties
    with nations that are committed to open markets--whether in the Western
    Hemisphere, across the Pacific, or beyond the Atlantic. As we moved
    these FTA negotiations toward completion, we worked closely with the
    Congress--and the Senate Finance and House Ways and Means Committees in
    particular--to determine how best to address the concerns and interests
    of the Congress and the American people. For example, the Chile and
    Singapore agreements successfully incorporate new approaches to
    governing e-commerce, labor, investment, and the environment that were
    articulated in the Trade Act of 2002.
        In 2002 we also notified Congress and then launched FTA
    negotiations with a number of new countries:

         LWith Morocco, a leading moderate and reformist Arab
    nation that offers commercial opportunity, which can serve as a model
    and hub for a region that can gain enormously from economic reforms,
    and has been a staunch partner in the global effort to defeat
    terrorism.
         LWith the five nations of the Central American Common
    Market--Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua--to
    encourage economic development and democracy in a region that has shown
    its potential by already representing $20 billion trade with the United
    States and which has made great progress over the decade.
         LWith the five members of the Southern African Customs
    Union (Botswana, Lesotho, Namibia, South Africa, and Swaziland), which
    will be America's first free trade agreement with Sub-Saharan African
    nations. The 48 countries of sub-Saharan Africa represent a largely
    untapped market for American business. As these countries progress
    economically, they will require substantial new infrastructure in
    sectors as diverse as energy, agriculture, and telecommunications--
    areas in which U.S. firms lead the world. Thanks to the President's
    leadership on Africa, there is today a unique convergence of
    opportunities for us to promote African development and expand
    commercial opportunities for American businesses.
         LAnd with Australia, our 14th largest trading partner and
    a growing economy, a key U.S. ally, and an important center in the
    network of American companies doing business in the Asia-Pacific
    region.

        These regional and bilateral FTAs will bring substantial economic
    gains to American families, workers, consumers, farmers, and
    businesses. They also promote the broader U.S. trade agenda by serving
    as models, breaking new negotiating ground, and setting high standards.
    Our agreements with Chile and Singapore, for example, have helped
    advance U.S. interests in areas such as e-commerce, intellectual
    property, labor and environmental standards, regulatory transparency,
    and the burgeoning services trade.
        As we work intensively on these FTA negotiations, the United States
    is learning about the perspectives of our trading partners. Our FTA
    partners are the vanguard of a new global coalition for open markets.
    These partners are also helping us to expand support for free trade at
    home. Each set of talks enables legislators and the public to see the
    practical benefits of more open trade, often with societies of special
    interest for reasons of history, geography, security, or other ties.
    The Bush Administration's FTA initiatives have helped shift the debate
    in America to the agenda of opening markets, and away from the
    protectionists' defensive agenda of closing them.
        Our regional and bilateral free-trade agenda conveys the message
    that America is open to trade liberalization with all regions--Latin
    America, sub-Saharan Africa, the Asia-Pacific, the Arab world--and with
    both developing and developed economies. In October 2002, President
    Bush laid the groundwork for future market-opening initiatives by
    announcing the Enterprise for ASEAN Initiative. The EAI offers the
    prospect of bilateral FTAs between the United States and those members
    of the Association of Southeast Asian Nations that are ready to meet
    the high standards of a U.S. FTA and also pledges to assist countries
    in joining the WTO. This past year we also signed Trade and Investment
    Framework Agreements with Sri Lanka, Brunei, the West African Monetary
    Union, Tunisia, Bahrain, and Thailand. In addition, the United States
    signed a Comprehensive Trade Package with Hungary in 2002 that lowered
    barriers to $180 million worth of U.S. exports per year.
        We look forward to discussing these initiatives with the
    appropriate committees in Congress, and we will seek continued input on
    these and other possible FTAs.
        Over the coming year, we intend to press the goals articulated in
    the Trade Act of 2002. The President's regional and bilateral free
    trade agenda--combined with a clear commitment to reducing global
    barriers to trade through the WTO--will leverage the American economy's
    size and attractiveness to stimulate competition for openness, moving
    the world closer, step-by-step, towards the goal of comprehensive free
    trade.

    Building New Bridges: Preferential Trade Programs and Capacity Building

        A free and open trading system is critical for the developing
    world. As President Bush has pointed out, ``Open trade fuels the
    engines of economic growth that creates new jobs and new income. It
    applies the power of markets to the needs of the poor. It spurs the
    process of economic and legal reform. It helps dismantle protectionist
    bureaucracies that stifle incentive and invite corruption. And open
    trade reinforces the habits of liberty that sustain democracy over the
    long term.''
        Over the past year, the United States has matched its rhetoric on
    helping developing countries through trade with action. First, the
    Trade Act of 2002 renewed the Generalized System of Preferences (GSP),
    which enables some 3,500 products from 140 developing economies to
    enter the United States free of duties. We have invited countries to
    submit petitions for products that should be added to the GSP list.
        Second, the new Trade Act extended and augmented the Andean Trade
    Preference Act (ATPA)--first implemented in 1991 by President George
    H.W. Bush--by increasing the list of duty-free products to some 6,300.
    ATPA is a vital program for the four Andean democracies on the front
    lines of the fight against narcotics production and trafficking.
        Third, the Act expanded the Caribbean Basin Trade Partnership Act
    (CBTPA) by liberalizing apparel provisions, providing a vital economic
    stepping stone for some of the poorest countries in our hemisphere.
        Finally, we continued the important implementation of the far-
    sighted African Growth and Opportunity Act (AGOA), which Congress
    enacted in May 2000 and expanded with the ``AGOA II'' provisions of the
    Trade Act of 2002. AGOA opens the door for African nations to enter the
    trading system effectively, increases opportunities for U.S. exports
    and businesses, supports government reforms and transparency, and
    widens the recognition of the benefits of trade in the United States.
    It extends duty-free and quota-free access to the U.S. market for
    nearly all goods produced in the 38 eligible beneficiary nations of
    sub-Saharan Africa. Moreover, by providing incentives for African
    countries to open their markets and improve the environment for trade
    and investment, AGOA has helped to boost American exports to the
    region. U.S. merchandise exports to sub-Saharan Africa are up by 25
    percent since AGOA's enactment, to nearly $7 billion last year, led by
    aircraft, oil and gas field equipment, and motor vehicles and spare
    parts.
        The second annual AGOA forum in January 2003 provided an
    opportunity to evaluate AGOA's achievements and address implementation
    challenges. Gathering in Mauritius, members of Chairman Thomas'
    delegation, Administration officials, and business representatives
    learned more about AGOA success stories, such as new jobs and
    investments in Cape Verde, Senegal, Rwanda, and Uganda. The real,
    positive experiences of American businesses and their African hosts
    provide models to emulate and help us better address the challenges
    inherent in promoting growth and commercial opportunities in Africa--
    particularly the challenge of maximizing and realizing tangible
    benefits across all the countries in the region.
        Moving forward, the Bush Administration is committed to expanding
    America's economic links with Africa. Most important, we are asking
    Congress to extend AGOA beyond its 2008 expiration date. We have opened
    Regional Hubs for Global Competitiveness in Botswana, Kenya, and Ghana
    in 2002--each staffed with technical experts who will provide support
    on WTO issues, AGOA implementation, private sector development, and
    other trade topics. We are adding a specialist to each Hub from the
    Department of Agriculture to help African farm exports meet U.S. health
    and safety standards. Finally, we have designated a new Deputy
    Assistant Trade Representative who focuses exclusively on trade
    capacity-building activities.
        Through AGOA and our other preferential trade programs, the Bush
    Administration will lend increasing support to developing countries
    that desire to take part in trade negotiations, implement complex
    agreements, and use trade as an engine of economic growth. We will
    build on current partnerships among agencies of the U.S. Government--
    such as AID, OPIC, and the Department of Agriculture--and with
    multilateral and regional institutions. Continued advice,
    encouragement, and support from Congress are vital to this endeavor.

    Monitoring and Enforcing Trade Agreements

        For the United States to maintain an effective trade policy and an
    open international trading system, our citizens must have confidence
    that trade is fair and works for the good of our people. That means
    ensuring that other countries live up to their obligations under the
    trade agreements they sign. Over the past year, we have successfully
    resolved disputes and aggressively monitored and enforced U.S. rights
    under international trade agreements and U.S. court rulings in ways
    that benefit American producers, exporters, and consumers. Sectors that
    have been affected include entertainment, high-technology, automobiles,
    and agriculture.
        In 2003, we will seek to resolve favorably other trade disputes in
    a way that best serves America's interests. Among the most prominent
    cases are: telecommunications and sweeteners with Mexico; softwood
    lumber with Canada; beef with the European Union; and apples with
    Japan.
        The United States should also live up to its obligations under WTO
    rules. In particular, the Administration needs the assistance of the
    Congress to come into compliance in cases dealing with the FSC/ETI law,
    the 1916 Act, the ``Irish Music'' copyright violation, the ``Byrd
    Amendment,'' section 211 of the Omnibus Appropriations Act of 1998, and
    hot-rolled steel. We recognize that each matter involves sensitive
    interests. Yet America should keep its word, just as we insist others
    must do. As the largest trading nation, the WTO rules serve U.S.
    interests. We will work closely with the Congress to determine
    approaches to resolve these issues.
        We intend to continue addressing unjustified science and health
    measures that impede farm exports, and undermine safe and productive
    innovation in agriculture. We will be vigilant in defending the right
    to market safe agricultural biotechnology products in Europe and
    elsewhere--the continuation of a long tradition in agricultural
    progress--which holds out great potential for mitigating the
    environmental impact of food production, nourishing the world's
    expanding population, improving health and nutrition, and bolstering
    farmers' productivity and prosperity around the world, most especially
    in the developing world.
        The current EU moratorium on biotechnology is in violation of both
    WTO rules and the EU's own laws. The Administration, leaders of
    Congress, and our agriculture community have made clear that we believe
    the EU should lift its moratorium on biotech products, and we are
    working with others to determine the most expeditious way to get it to
    do so.

    Preserving Safeguards and Trade Laws Against Unfair Practices

        One of the principal negotiating objectives of the Trade Act of
    2002 is to ``preserve the ability of the United States to enforce
    rigorously its trade laws, including the antidumping, countervailing
    duty, and safeguard laws, and avoid agreements which lessen the
    effectiveness of domestic and international disciplines on unfair
    trade, especially dumping and subsidies, in order to ensure that United
    States workers, agricultural producers, and firms can compete fully on
    fair terms and enjoy the benefits of reciprocal trade concessions.''
        Maintaining public support for open trade means providing
    appropriate assistance to those industries that find it difficult to
    adjust promptly to the rapid changes unleashed by technology, trade,
    and other forces. We will continue our commitment to the effective use
    of statutory safeguards, consistent with WTO rules, to assist American
    producers. Used properly, these safeguards--such as Section 201 of the
    Trade Act of 1974--can give producers vital breathing space while they
    restructure and regain competitiveness.
        For example, on March 5, 2002, in response to a unanimous finding
    by the U.S. International Trade Commission (ITC) that imports were a
    substantial cause of serious injury to the U.S. steel industry, the
    President announced temporary tariffs on imports of certain steel
    products. The ITC safeguard investigation was part of a three-pronged
    initiative announced on June 5, 2001, that also included negotiations
    at the Organization for Economic Cooperation and Development (OECD) to
    encourage the reduction of excess global capacity and to eliminate the
    market-distorting subsidies that led to current overcapacity.
        The President's approach has given the U.S. steel industry and its
    workers the chance to adjust to import competition while safeguarding
    the needs of steel consumers. The Section 201 remedy preserved access
    to specialty steels by excluding over 700 products from the increased
    tariffs. In addition, the tariffs did not apply to imports from
    countries that have committed to the highest level of reciprocal market
    access--our NAFTA and other FTA partners. Most developing countries
    have also continued to enjoy open access to the U.S. steel market.
        Since the temporary tariffs took effect, domestic steel companies
    have taken serious steps to restructure and increase productivity. As
    of January 2003, these steps included: International Steel Group's
    (ISG) purchase of the steelmaking assets of LTV Corporation and Acme
    Steel; ISG's offer to purchase the assets of Bethlehem Steel; two
    competing offers to purchase National Steel Corp.; the negotiation of a
    groundbreaking labor contract between the United Steelworkers of
    America and ISG; and numerous mergers and acquisitions in the minimill
    sector.
        We made important progress in the OECD steel negotiations in 2002.
    Participants established a peer review process to examine global steel
    capacity closures and decided to immediately develop the elements of an
    agreement for cutting trade-distorting subsidies in steel.
        Given America's relative openness, strong, effective laws against
    unfair practices are important for maintaining domestic support for
    trade. This Administration has used and continues to back the use of
    these laws. At the same time, however, we recognize that the recent
    proliferation overseas of anti-dumping laws in particular has resulted
    in abuses against U.S. exporters by countries that do not apply their
    laws in a fair and transparent manner. Our objective in the WTO
    negotiations is to curb abuses while preserving the basic concepts,
    principles, and effectiveness of unfair trade laws. Moreover, the
    United States has insisted that any discussion of trade remedy laws
    must also address the underlying subsidy and dumping practices that
    give rise to the need for trade remedies in the first place.
        We continue to advance an affirmative U.S. agenda, targeting the
    increasing misuse of these laws, particularly by developing countries,
    to block U.S. exports. From 1995 through the first half of 2002, there
    were 105 investigations by 18 countries of U.S. exporters. The most
    frequently targeted U.S. industries are chemical, steel, and other
    metal producers, although U.S. farm products are increasingly being
    blocked. The WTO negotiations will help us address significant
    shortcomings in foreign anti-dumping and countervailing duty procedures
    by more clearly defining the specific circumstances that give rise to
    unfair trade, improving transparency in how anti-dumping laws are
    applied, and strengthening due process.

    Aligning Trade with America's Values

        America's trade agenda needs to be aligned securely with the values
    of our society. Trade promotes freedom by supporting the development of
    the private sector, encouraging the rule of law, spurring economic
    liberty, and increasing freedom of choice. Trade also serves our
    security interests in the campaign against terrorism by helping to
    tackle the global challenges of poverty and privation. Poverty does not
    cause terrorism, but there is little doubt that poor, fragmented
    societies can become havens in which terrorists can thrive.
        Developing countries have much to gain by joining the global
    trading system. From Seoul to Santiago, when trade grows, income
    follows. The World Bank conducted a study of developing countries that
    opened themselves to global competition in the 1990s and of those that
    did not. The income per person for globalizing developing countries
    grew by five percent a year, while incomes in non-globalizing poor
    countries grew just over one percent. Developing countries that
    embraced trade and openness sharply reduced absolute poverty rates over
    the last 20 years, and the income levels of the poorest households have
    kept up with the growth.
        By knitting America to peoples beyond our shores, new U.S. trade
    agreements can also encourage reforms that will help establish the
    basic building blocks for long-term development in open societies,
    including:

         LThe rule of law: Trade agreements encourage the
    development of enforceable contracts and fair, transparent governance--
    helping to expose corruption.
         LPrivate property rights: These are a necessary ingredient
    for economic development because they encourage saving, investment,
    exchange, and entrepreneurship. Trade agreements bolster property
    rights by safeguarding the right to establish businesses, guaranteeing
    that investments will not be appropriated arbitrarily, supporting
    privatization, and fostering knowledge industries.
         LCompetition: Free trade fosters competition, the hallmark
    of successful economies. Developing countries suffer at the hands of
    elites who cling to their positions by depriving ordinary citizens of
    less-expensive, better-quality goods and services that can be had
    through competition. Free trade agreements attack manipulated licensing
    systems, state monopolies and oligarchies that keep affordable products
    off store shelves.
         LSectoral reform: Trade agreements drive market reforms in
    sectors ranging from e-commerce to farming. For example, in our FTA
    discussions with Morocco, we are examining how we can work with
    Morocco's World Bank program to restructure its agricultural sector.
    The United States has also advanced an aggressive agriculture reform
    proposal in the WTO negotiations that would eliminate $100 billion
    globally in trade-distorting farm subsidies and lead to better
    agricultural policies in developed and developing countries alike.
         LRegional integration: The lesson of the European Union
    and NAFTA is that location matters, in economics as in politics.
    Therefore, as FTA negotiations with democracies in Central America and
    Southern Africa progress, we will explore how best to support
    beneficial regional integration and promote growth clusters.

        From its first days, the Bush Administration recognized that poor
    countries cannot succeed with economic reform and growth if they are
    eviscerated by pandemics. Flexibility on the implementation of
    intellectual property protection, and lower-priced medicines, must be
    part of a larger global response to health pandemics, involving
    education, prevention, care, training, and treatment. The United States
    is committed to supplying funds for HIV/AIDS, tuberculosis, and malaria
    assistance, funding related research, prevention, care, and treatment
    programs, much of which helps to address problems in developing
    countries.
        The United States was the first contributor--and remains the
    largest--to the international ``Global Fund to Fight AIDS, TB and
    Malaria.'' The seriousness of the Administration's commitment to battle
    AIDS was recently underscored by President Bush's dramatic call for a
    tripling of U.S. AIDS spending--to $15 billion over the next five
    years--to establish an Emergency Plan for AIDS Relief. This
    comprehensive program is designed to prevent 7 million new AIDS
    infections, treat at least 2 million people with life-extending drugs,
    and provide humane care for millions of people suffering from AIDS, and
    to meet the needs of children orphaned by AIDS.
        Free trade is about freedom. This value is at the heart of our
    larger reform and development agenda. Just as U.S. economic policy
    after World War II helped establish democracy in Western Europe and
    Japan, today's free trade agenda will both open new markets for the
    United States and strengthen fragile democracies in Central and South
    America, Africa, and Asia.

    LPromoting a Cleaner Environment, Better Working Conditions, and
            Investment Protection

        Free trade promotes free markets, economic growth, expanded
    employment opportunities, and higher incomes. As countries grow
    wealthier, their citizens demand better working conditions and a
    cleaner environment. Economic growth gives governments more resources
    and incentives to promote and enforce strong standards in these areas.
        The Trade Act of 2002 gave us detailed guidance on the continued
    incorporation of labor and environmental issues into U.S. trade
    agreements, representing a delicate balance across the spectrum of
    concerns. The Administration has been drawing on this guidance--and
    would welcome additional insights--as we pursue these topics in our
    current trade negotiations. Similarly, we are conducting discussions
    with non-governmental organizations and the business community to
    ascertain how we can address concerns posed about investment provisions
    in trade agreements.
        The Chile and Singapore FTAs incorporate Congressional guidance
    into a robust environment and labor packages that place obligations
    within the text of these agreements and emphasize the importance of
    cooperative action. These FTAs encourage higher levels of environmental
    and labor protection, and obligate the signatories to effectively
    enforce their domestic labor and environmental laws. This ``effective
    enforcement provision'' is subject to dispute settlement and backed by
    equivalent penalties to press full compliance.
        In the case of Singapore--a small developed country with limited
    available land--cooperative efforts will focus on combating the illegal
    wildlife trade and on building environmental capacity in Singapore's
    Southeast Asian neighbors. With Chile, we recognized a need for broader
    initiatives, both to address the special needs of a natural resource-
    based economy and to build environmental capacity in the Southern Cone.
    The U.S.-Chile FTA sets out eight initial cooperative projects and
    calls for the negotiation of a separate environmental cooperation
    agreement.
        On labor, the Trade Act of 2002 directed the Administration ``to
    promote respect for worker rights and the rights of children consistent
    with the core labor standards of the International Labor
    Organization.'' In our FTAs with Chile and Singapore, we reaffirmed our
    respective obligations as members of the ILO and committed to uphold
    the ILO Declaration on Fundamental Principles and Rights at Work. We
    examined carefully the domestic labor laws in Chile and Singapore, and
    verified that their laws did, in fact, adequately respect the ILO's
    core worker rights. We also achieved a principal negotiating objective
    of TPA by including labor provisions that obligate signatories to
    effectively enforce domestic labor laws when they may affect trade. In
    support of the goal to promote respect for worker rights, the United
    States and Chile agreed to move forward on two labor technical
    cooperation projects--labor justice reform and labor law compliance. In
    2003, the United States will seek to negotiate labor and environment
    clauses in our trade agreements with the five Central American
    countries, Morocco, Southern Africa, and Australia.
        The Chile and Singapore FTAs include an innovative system of
    monetary assessments to help settle labor and environmental disputes in
    a manner equivalent to how we resolve commercial disputes. In these
    agreements, the first course of action in a labor, environmental, or
    commercial dispute will be consultation. If this fails, however, all
    disputes will be handled through the same settlement procedures. If
    these procedures fail to bring an offending party into compliance,
    fines are a possibility--the funds from which will be earmarked for
    measures to address the underlying labor or environmental problems.
    This system creates an incentive to comply to avoid fines, and also
    serves to reduce the likelihood of future non-compliance by using funds
    to remedy enforcement deficiencies. Only as a last resort--in cases of
    non-compliance and a failure to pay a monetary assessment--will FTA
    signatories have recourse to withdraw trade benefits. And those actions
    must be, as Congress directed, ``appropriate'' to the severity of the
    violation.
        The Administration has also addressed Congressional concerns about
    the intersections among investment, labor, and environmental
    protections. The Singapore and Chile FTAs provide greater transparency
    and accountability in the disputes investors can bring against host
    governments and ensure U.S. investors abroad get the same level of
    protection afforded under U.S. domestic law. These agreements
    incorporate foreign investment negotiating objectives from the Trade
    Act of 2002, including the authorization of amicus curiae submissions
    and public access to investor-state arbitration hearings and documents.
    In addition, the United States, Singapore, and Chile committed to
    explore the development and use of appellate mechanisms in investor-
    state dispute settlement and agreed on provisions aimed at eliminating
    and deterring frivolous claims. Drawing upon U.S. legal principles and
    practice, we clarified the obligations on expropriation and ``fair and
    equitable'' treatment.
        In the Doha Development Agenda, we are taking similar practical
    steps to demonstrate that good environmental, labor, and investment
    policies can be economically sound. In addition, we are working to
    encourage a healthy ``network'' among multilateral environmental
    agreements and the WTO, enhance institutional cooperation, and foster
    compatible, supportive regimes. This precedent will help to
    interconnect the WTO with other specialized organizations, such as the
    ILO.
        We know the imnportance of these topics for many Members of
    Congress who want to ensure that the benefits of trade and openness in
    spurring growth, productivity, and higher incomes are accompanied by
    enhanced scrutiny and transparency of labor and environmental laws and
    conditions. Some stress the need to safeguard America's sovereign
    rights in setting our own standards, while other Members want to deploy
    trade agreements to compel other nations to accept the standards we
    prefer. Some believe that the influence and investment of U.S.
    companies abroad will lead to higher standards and codes of behavior,
    while others fear the reach of globalized companies. It is our goal to
    use the guidance Congress has given to bridge the differences, build a
    stronger consensus, and make a real, positive difference for America
    and the world.

    Conclusion: Pressing the Free Trade Agenda Forward

        In the coming year, the United States will continue to make the
    case for the win-win nature of trade. Expanded trade--imports as well
    as exports--improves the well being of people everywhere. Trade
    promotes more competitive businesses, as well as the availability of
    more choices of goods and inputs, with lower prices.
        America's economy depends on trade. Businesses, small and large,
    sell and ship their products around the globe. At the same time, U.S.
    manufacturers rely on imported inputs to production to stay competitive
    with foreign producers. Over the past decade, U.S. exports accounted
    for about a quarter of our country's economic growth. Our exports
    support about 12 million jobs--jobs that pay wages 13 percent to 18
    percent higher than the U.S. average because they have higher
    productivity. One in three acres on American farms--accounting for over
    $56 billion in annual sales--is planted for export. And opening foreign
    markets is critical to the future growth of America's diverse services
    sector.
         President Bush understands the connection between ``a world that
    trades in freedom'' and America's interests in promoting a strong world
    economy, lifting societies out of poverty, and reinforcing the habits
    of liberty. Having reestablished U.S. trade leadership around the
    globe, the President is now working with Congress on an activist agenda
    to expand economic freedom at home and abroad.
        I appreciate the Committee's interest and support in trade and look
    forward to working with you, Mr. Chairman, and other Members of the
    Committee to advance a strong, successful trade agenda.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman THOMAS. Thank you, Mr. Ambassador.
        I am in possession of a news release from the European
    Union dated today. The European Commission submits to Member
    States a draft list of products that could be subject to
    countermeasures. The language goes something like this: This is
    a necessary procedural step to launch countermeasures if the
    compliance process does not deliver swift results.
        [The information follows:]

                EUROPEAN COMMISSION DELEGATION IN WASHINGTON DC
                                EU NEWS RELEASE
                                                            Press Contacts:
                                                 Willy Helin (202) 862-9530
                                              Maeve O'Beirne (202) 862-9549
    No. 13/03
    February 26, 2003
                          Foreign Sales Corporations:
      European Commission submits to Member States draft list of products
                    that could be subject to countermeasures
        The Commission has today communicated to EU Member States a revised
    draft list of products that could be subject to countermeasures in the
    FSC case. The list has been prepared on the basis of comments received
    from economic operators following the public consultation launched in
    September and it covers products in the amount of U.S. $4 billion, as
    awarded by the WTO last August. EU Trade Commissioner Pascal Lamy said:
    ``The EU's objective remains to ensure the repeal of this WTO-
    incompatible legislation. We are encouraged by President Bush's
    proposal for such a repeal in his budget for fiscal year 2004. In the
    meantime the EU is following the necessary procedural steps to launch
    countermeasures if the compliance process does not deliver swift
    results.''
        A final list will be drawn after consultation with EU Member States
    in the coming weeks. When final, the Commission intends to notify the
    definitive list to the WTO and request authorisation for the imposition
    of sanctions.
        The list of U.S. products which could be the object of
    countermeasures has been prepared after an unprecedented public
    consultation with economic operators. The several hundred submissions
    received from economic operators have allowed the Commission to assess
    and minimise the negative consequences that any eventual
    countermeasures could create for European industry.

    Background

        On 30 August 2002 the European Union was granted by the WTO the
    right to impose countermeasures in the form of tariffs on imports of
    certain goods from the U.S. The tariffs can be up to 100 percent ad
    valorem, to a maximum of U.S. $4 billion per year. On 13 September 2002
    the Commission published a list of products proposed to be covered by
    any retaliatory measures. In line with WTO practice, the list was set
    at a higher level than the amount set by the arbitrator (U.S. $4
    billion) in order to allow for exclusion of products following the
    consultation procedure. The aim of the consultation, which lasted 60
    days, was to minimise the negative consequences that any eventual
    sanctions could create to EU industry; in that respect, the Commission
    had included in the list products on which the U.S. import share was
    low (below 20% import share). The products included cover a wide range
    of goods selected from the 46 chapters of the Common Customs Tariff
    already notified to the WTO in November 2000. The exact definition of
    the CN codes can be obtained via Internet (http://europa.eu.int/eur-
    lex/ OJ L279 of 23 October 2001).
        The actual implementation of the trade sanctions will require
    action by the Council under Article 133 of the EC Treaty. A Council
    Regulation needs, therefore, to be adopted following a proposal from
    the Commission. Under WTO rules, there are no deadlines to implement
    sanctions.
        The EU only needs to request authorisation from the WTO Dispute
    Settlement Body (DSB). The DSB decision is only a formal step as
    authorisation is granted unless the DSB decides by consensus to reject
    the request. There are no legal deadlines within which the request must
    be made to the DSB.

        Swift, of course, is sometimes in the eye of the beholder,
    but my question is directed to a story in the Financial Times
    in which Trade Commissioner Lamy says, ``He praised Bill
    Thomas, Chairman of the House of Representatives powerful
    Committee on Ways and Means, for his determination to draft new
    legislation.''
        [Laughter.]
        [The information follows:]
                                                            Financial Times
                                                          February 26, 2003
              Lamy Hails Chirac Plan on Farm Subsidies Suspension
                                    BRUSSELS
        French president Jacques Chirac's call for rich nations to suspend
    subsidies on farm exports to poor ones was a positive move that
    strengthened the European Union's negotiating position in the Doha
    world trade round, the EU's trade commissioner said yesterday.
        Mr Chirac's proposal, made at last week's Francophone African
    summit in Paris, was ``good news and a sign that the potential
    contradiction between the French position on agriculture and the French
    position on development is being seriously addressed,'' Pascal Lamy
    said in an interview. ``It adds to our toolbox in this negotiation.''
        But Mr. Lamy stopped short of promising to incorporate Mr Chirac's
    proposal in the EU's formal negotiating position. He said Brussels had
    already called in the Doha round for better farm trade terms for poor
    countries and doubted whether the U.S. would accept Mr Chirac's demand
    that his proposed suspension cover exports credits and food aid.
        Until now, many observers have viewed Mr Chirac's outspoken defence
    of Europe's common agricultural policy (CAP) as in conflict with his
    claims to champion developing countries' interests and were surprised
    by his admission last week that export subsidies harmed the latter's
    economies.
        However, the French president dashed hopes at the weekend that
    France was softening its opposition to rapid CAP reform, accusing Franz
    Fischler, agriculture commissioner, of ``obstinacy'' in pressing for
    phased reductions in production-related EU subsidies.
        Mr. Lamy, who visits Washington next week for talks with President
    George W. Bush's Administration and leading Members of Congress, struck
    a conciliatory tone toward the U.S. He said the two sides were co-
    operating in the Doha round and stressed his determination to seek
    amicable solutions to bilateral trade disputes.
        His visit coincides with EU moves to draw up a final list of U.S.
    exports worth Dollars 4bn (Pounds 2.5bn) targeted for retaliation if
    Washington refuses to comply with a World Trade Organisation ruling
    against the U.S. Foreign Sales Corporation's business tax-break law.
        However, Mr. Lamy ruled out early retaliation, insisting the list
    was only a precautionary measure, in case the U.S. failed to repeal the
    law. He praised Bill Thomas, chairman of the House of Representatives'
    powerful Ways and Means Committee, for his determination to draft new
    legislation.
        The trade commissioner said he was setting no deadlines for U.S.
    action, or for compliance with WTO rulings against U.S. laws on anti-
    dumping, copyright and trademarks. He did not want to take such a step
    unless it became clear that the U.S. was unable or unwilling to
    implement the rulings.
        Nonetheless, he said, resolving some disputes, such as over the
    Byrd amendment directing payment of anti-dumping duties to affected
    U.S. companies, would not be easy. ``The worry is that things like this
    pile up . . . we should remove them from the table one by one, and I'm
    quite worried that we come to a situation where we have a logjam.''
                                       By TOBIAS BUCK and GUY DE JONQUIERES

        [Laughter.]
        Chairman THOMAS. Before further damage to my reputation
    occurs, what is your attitude about our ability to negotiate
    away the FSC problem versus the need to move legislation and
    the timeliness of moving that legislation?
        Mr. ZOELLICK. Well, I agree that it is a powerful Committee
    on Ways and Means. Well, we have had this discussion among many
    of us a number of times. The reality is we have lost this case
    four times, including the appeals. I know that the Committee
    made an effort with the Extra Territorial Income (ETI) bill in
    the last Administration to try a fix. It didn't work. I think
    what Commissioner Lamy was making the point in this article,
    Chairman, was that his interest is in compliance, not
    retaliation. This step is putting together the list, and the
    important part is, as we have all talked about, we figure out a
    way to get us out of this box with something that we found in
    violation.
        As we have discussed, I personally believe the EC will hold
    off for a while, but I don't know how long. I told you last
    year I thought we could extend it through the end of the year
    if we showed action, and the Chairman did step out. It is
    clearly not an easy issue. You showed leadership by coming
    forward with a bill. I think the best advice I can give is that
    I think it is going to be important to move on this soon this
    year to avoid retaliation.
        Now, I don't necessarily believe you are going to get the
    full $4 billion, but at some point they are going to start to
    retaliate.
        Some of you have asked on the tax policy issues at various
    points, so I checked again what our tax policy people at
    Treasury have said, who obviously have the lead on this. It is
    that the Chairman's bill is an important first step, and I
    thank you for it. Frankly, I would be in a much more difficult
    position internationally if he hadn't gone forward with it.
        Tax policy has pointed out that it would help us comply
    with the ruling and it levels the playing field for U.S.
    companies. There has been a task force of the Senate and House
    that I know has tried to come up with ideas. I personally have
    urged companies to make suggestions. As we have discussed, you
    are open to various possibilities for amendments.
        My bottom line, Chairman, is we can't make this go away,
    and it has got to get fixed; and if it doesn't get fixed before
    too long, I think we are going to face retaliation.
        Chairman THOMAS. I thank the Ambassador. I want to
    underscore the Ambassador's statement about the Kimberley
    process. We are ready to go as soon as we have confirmation
    that a waiver has been provided. The Chair intends to introduce
    legislation and put it on the fast track and move it through
    the House and the Senate. The difficulty, of course, is our
    interpretation of the WTO and our need for a waiver as opposed
    to others. My understanding is that a waiver is imminent, but
    perhaps not yet delivered. As soon as it is delivered, the
    legislation will move.
        Some of us have been reading the Harbinson paper, Chairman
    Harbinson, on agriculture. Obviously if you are reading for
    content and looking for areas that are pleasing, the Chair
    noted that there was no support for the geographic indicators
    position of our friends who make champagne and other products.
        Still, overall it was a kind of ambition-less project given
    where we are and what we need to do. The Chair's interpretation
    of what the European Union is doing in laying the groundwork
    for accepting 10 new members and what appears to many of us a
    fundamental clash with the common agricultural policy, and that
    if they are going to absorb the new 10 in 2004, they need to
    adjust the common agricultural policy in 2003; and how much
    that would create a more positive atmosphere for the potential
    of the agricultural subsidy solution through the Doha Round.
        Where are you in terms of your comfort level that the
    Europeans understand and will be able to address the common
    agricultural policy modifications and, therefore, the obvious
    linkage to changes to make Cancun and beyond successful in the
    Doha Round?
        Mr. ZOELLICK. Thank you, Mr. Chairman. Let me just start by
    making sure we all have an understanding of what the Harbinson
    text is.
        Given that you have 144 members in the WTO, the way the
    process often moves forward is the Chairman of a negotiating
    group will consult with people and put out a text as a basis.
    It is thankless task. I appreciate Chairman Harbinson's effort.
    He is a fine professional. Frankly, we generally felt it wasn't
    ambitious enough.
        It would eliminate export subsidies, and that is a very
    good thing. As I mentioned, I was pleased to see that President
    Chirac now partially favors elimination of export subsidies,
    and we encourage him to follow through for the rest of us in
    the world and other developing countries.
        We would actually like to get it done sooner. We propose
    that it be done in 5 years. Harbinson talks about 9 years.
        In the area of tariffs, we think there should be more
    ambition in cutting tariffs. This is in part his effort to
    compromise with countries like Japan that have tariffs on rice
    of 500 to 1,000 percent and will still object. Frankly, we feel
    that if we are going to cut subsidies, we are going to need
    more tariff cuts.
        Then in the subsidies area, I think the real challenge is
    there is still a large gap between the European numbers and the
    U.S. numbers. At the end of the Uruguay round, there was a
    compromise made, as you always do when you try to close out a
    deal. The nature of the compromise was you put a cap on many of
    the subsidies that existed in the past. The European number for
    these domestic subsidies that affect trade was $60 billion
    plus. The U.S. number was $19.1 billion. The Japan number was
    $30 billion.
        Well, we have got to harmonize. We are willing to cut ours,
    and our proposal would cut ours down to 10.5, but we have got
    to get the European and Japanese numbers down, too. That gap is
    still too big.
        As for where it leads us, the meeting that I was at in
    Tokyo was of 22 Ministers, about 7 or 8 days ago, and the
    unfortunate part is that even though we have our disagreements
    with the Harbinson text, we thought it was a starting point.
    Our colleagues in Europe and Japan were more reluctant, and
    that brings us back to the point that Chairman Thomas was
    making about agriculture policy in Europe.
        I think the fundamental need, if we are going to be
    successful in Doha, is to have the Europeans be successful in
    reforming the common agricultural program.
        Now, the good news is that the Agriculture Commissioner,
    Franz Fischler, has put forward a proposal that would take
    advantage of the WTO rules to move a lot of the subsidies to
    the green box. Now, I don't know whether it is enough to
    frankly get Europe to support broad liberalization, but it is
    an important start. Unfortunately, there are a number of key
    member States that have resisted this.
        So, on this one, frankly, my honest assessment is that
    Europe and, to a degree, Japan are holding up the agriculture
    negotiations. Without moving on the agriculture negotiations, I
    think the Doha Agenda is going to find itself stuck.
        Mr. CRANE. [Presiding.] Thank you, Mr. Ambassador. Mr.
    Rangel?
        Mr. RANGEL. Mr. Chairman, let me first thank you for the
    cooperative spirit in which you have entered into these
    international agreements by bringing both the majority and
    minority members to the table to discuss our views on these
    very complex international issues.
        Second, I know that you do want and should want to stay out
    of an partisan disputes that may exist with this Committee. I
    know that you have gone out of your way to try to convince us
    that this FSC problem is a tax problem and not a trade problem,
    or some mumbling that you don't have jurisdiction but someone
    else does, and the other person comes and they say it is a
    trade issue.
        I am still going to take the risk to say that if the Chair
    says that he has a bill and he is going to move the bill, and
    it turns out that this is a controversial, partisan dispute, I
    don't see how in God's name this is going to help you to
    convince the WTO that we are taking their charges seriously.
        On the other hand, if there was an area that you can tell
    your colleagues in the U.S. Department of the Treasury that the
    $50 billion that would be available as a result of us repealing
    existing tax laws in order to be in compliance with the WTO,
    that we could find some way to encourage our manufacturers
    through tax incentives to be more competitive as opposed to the
    Chairman's idea that we reward those manufacturers or those
    businesses that have decided to operate outside of the United
    States, it just seems to me, whether you like it or not, that
    you are going to have to explain these policies.
        So, I do hope at some time--because I am not here to make
    you feel awkward, but if you don't want to see a train wreck
    here, I advise you to go to Treasury and ask them for some
    guidance as to how we can make your job easier as we deal with
    this politically packed argument of FSC.
        Lastly, which I could expect an answer now, and that is
    that I understand that the Administration is supportive of
    normalizing or granting permanent normal trade relations with
    Russia. I think you have discussed this with members of both
    sides, that we want to put the issues that separated us in the
    Cold War behind us. Is that an accurate statement?
        Mr. ZOELLICK. Yes, sir.
        Mr. RANGEL. Could you tell me why we would not want to
    pursue that same foreign policy with Cuba and to put the Cold
    War behind us and to treat these communists the way we do the
    rest of these scoundrels in China and North Vietnam to break
    down their hold on these people through their anti-capitalistic
    way of thinking and to allow the rays of sunshine, democracy,
    and free trade to prevail against these formerly evil empires?
        Mr. ZOELLICK. Thank you, Mr. Rangel. You made it----
        Mr. RANGEL. I have my flag pin on today just in case.
        Mr. ZOELLICK. You made it easier for me because I do think
    there is a very big difference between Russia and Cuba. While
    Russia is not perfect as a democracy, it does have elections.
    It has moved towards the rule of law. It has a much more open
    economy than it did during the days of the Soviet Union. So,
    they are making progress, and so----
        Mr. RANGEL. What about China? Will you share with me the
    progress? I have a substantial Chinese community in my
    district. Could you tell me what progress--this is going to be
    very interesting. Could you give me a paper on the progress
    that all these communist countries are making? This is really
    going to test our credibility. Now that we see the progress
    made by the former Soviet Union, which really makes me feel a
    lot better, because I didn't know this, would you find the same
    progress being made in China?
        Mr. ZOELLICK. Actually, Mr. Rangel, I first went into China
    in 1980 when I lived in Hong Kong, and the China of today is
    vastly different from the China of 1980. In terms of the
    openness, of course, it is not a democracy. The question is: Is
    the leadership moving in a direction and do you think the
    process of openness and trade is something that they are
    welcoming to try to open the system? I think that is the
    difference.
        Mr. RANGEL. Which comes first? Which comes first, though?
    Do you wait for them to make the move, or is trade and commerce
    supposed to open the door for the people to see the values of a
    democracy?
        Mr. ZOELLICK. Well, I understand. That is certainly a
    reasonable argument. I think that the record of Castro has not
    been one where any opening or any money has been used to open
    up the society, and we have had some 40 years to test it.
        Mr. RANGEL. Well, my last question on this issue is that--
    would you suspect that there would be domestic political
    objectives involved in this, to wit, the electoral college
    votes in Florida? Would this be involved in your trade
    decisions as to whether or not this is the proper time to do
    it?
        Mr. ZOELLICK. Mr. Rangel, as you are well aware, there are
    views all throughout this Congress that are a combination of
    politics and economics. I am frequently trying to deal with
    concerns, for example, the Dominican Republic, where you have a
    trade concern but you also have a political concern. They are
    both in commonality. They are a shared concern. I respect that.
    So, do other people, and that is a balance of what
    Administrations and Congresses deal with.
        I am sure you would share my view that Cuba is a society
    that remains imprisoned in many ways in the violations of human
    rights and the cruelties of Castro and the communist regime are
    not something that anyone would remotely want to affirm or
    endorse.
        Now, you have a different way of approaching it than other
    people do. People have different experiences. I respect that,
    and I hope you respect that of mine and others.
        Mr. RANGEL. So, what you are saying is my advocacy of free
    and open trade with the Dominican Republic because of my broad
    Dominican constituency is the same as those that would come
    from Cuba who would want to close the trade relationship with
    Cuba because of their differences with this communist
    government, that that would be basically the same thing we are
    talking----
        Mr. ZOELLICK. Now, Mr. Rangel, that isn't what I said. What
    I said is there is a mixture of political and economic
    interests, and I said I respect it. I share your interest in
    trying to help the Dominican Republic. It has also had its
    political problems. It has its political problems today. It is
    moving in the right direction.
        You are trying to bring it in that way. I am trying to
    bring it in that way. I haven't seen that in Cuba.
        Mr. RANGEL. Well, I am not a candidate for President, but
    if I were the President, I would have asked you to be willing
    to serve as my Trade Ambassador. I am confident that your views
    would be more flexible. Thank you.
        Mr. ZOELLICK. Well, if you are ever elected President, Mr.
    Rangel, I will be pleased to serve with you.
        [Laughter.]
        Mr. CRANE. The gentleman's time has expired. Now, Mr. Stark
    is not here. Okay. I would like to yield to Mr. Matsui, who has
    got an appointment, and he has a short, brief question, I
    guess, for you, Mr. Ambassador.
        Mr. MATSUI. Thank you very much, Mr. Chairman. I appreciate
    this very much.
        Mr. Ambassador, I want to just commend you. I know it is a
    very difficult job out there in the international market now,
    and you are obviously trying the very best you can in terms of
    Doha and some of the other issues you have been working on.
    Certainly on both sides of the aisle, we want to be active in
    terms of helping you and supporting you.
        I will say, however--and this is my only comment; I don't
    even need a response from you--that it is a little
    disconcerting, as Mr. Levin says, when you start off in your
    second paragraph, ``Over the past year, working together, we
    have rebuilt America's trade leadership''--or ``leadership on
    trade.'' Now, maybe your staff did it. Who knows? Obviously you
    read it; it is part of your statement. I would just like to
    point out that we did have a 201 case in steel last year.
    Obviously it has been--a lot of waivers have been given, so it
    is probably about 7 percent effective now. We did have some
    work on textiles that was taken care of during the discussions
    on fast track. Certainly there has been a number of retreats in
    the area of trade. I understand that because you had to get
    bills passed, the fast track bill in particular. So, obviously
    nobody would want to take issue with you on that.
        The farm bill, obviously that is another one, a $100
    billion farm bill. So, some of these issues are out there, and
    I wouldn't want to have anybody think that there is a purist in
    the White House in terms of the issue of open and free trade. I
    would like to just take a moment because I think----
        Mr. ZOELLICK. Could I respond to that point, Mr. Matsui?
        Mr. MATSUI. Well, let me finish.
        Mr. ZOELLICK. It is not a question?
        Mr. MATSUI. If I can just finish.
        Mr. ZOELLICK. Okay.
        Mr. MATSUI. Ambassador Barshefsky and obviously Mr. Kantor
    I felt did a reasonably good job, a very good job. In fact, I
    think they were two of the best USTRs we have had perhaps in
    the history of our country, and, you obviously have done a
    great job as well given the very difficult times we have had.
        I would like to just point this out. They passed NAFTA.
    Obviously President George H.W. Bush was responsible to a large
    extent in putting it together. We had a very difficult time
    because of getting the rule passed, but we passed in December
    of 1994 the Uruguay Round with over 350 votes. That wasn't an
    easy thing to do with 350--340-some countries involved annually
    who passed the PNTR--China trade, the most-favored-nations, and
    then finally Ambassador Barshefsky negotiated a wonderful
    agreement that the whole business community was supportive of
    in terms of China PNTR, which we were all involved in.
        We passed AGOA really with both Mr. Rangel and Mr. Crane's
    leadership. We passed--negotiated the Cambodia textiles
    agreement. We did negotiate the Jordan Free Trade Agreement and
    a Vietnam bilateral trade agreement. Obviously these were
    passed under the leadership of yourself and President Bush, but
    these were negotiated by Ambassador Barshefsky and President
    Clinton.
        We had a basic telecom annex to the WTO--telecom, which was
    a big deal to Americans; negotiated a financial services annex,
    WTO service agreement; and we also had a number of intellectual
    property agreements, but particularly with China, and that was
    an extremely difficult one because I remember years and years
    ago when Madam Wu came and basically denied that there was even
    a problem. We negotiated an agreement with China.
        So, I would hope that you would help us maintain, to the
    extent we can, a bipartisan approach to all these issues. It
    makes it very difficult when--it is almost as if the past 8
    years is treated as if it were perhaps not as significant as
    the last 2 years. I obviously have at least another 2 years to
    go, so I would hope that in those 2 years you will show the
    kind of leadership we saw over the last 8 years under President
    Clinton.
        You can respond if you want, but I just wanted to make that
    observation, because I think it is important that we not
    diminish predecessors, the people that came before you.
        Mr. ZOELLICK. Well, thank you, Mr. Matsui. I don't think
    anything I have said or have ever said has diminished the
    people that came before me, who I have respect for. I am the
    13th in a long line of people with a tough job. It is an
    unlucky number. I feel I am successful if I now have both sides
    of the aisle trying to press the case for why we should open
    markets, because I often don't hear that.
        I do believe we have restored American leadership on trade,
    so they are my words. I am pleased if you are willing to debate
    it, because I think the failure to have TPA for 8 years was a
    big lapse. Many people around the world feel the same thing. I
    think Seattle was a dismal failure, and I think we have
    reversed that. I think that that doesn't mean that good things
    didn't happen, particularly in the first years of the Clinton
    Administration. I fought for and supported the efforts of the
    Administration passing NAFTA and the WTO round. I was there in
    the White House when we closed the agricultural agreement in
    late 1992, and I think Mickey Kantor and his colleagues did an
    excellent job in pushing that forward.
        I then think things lapsed, and this, as I said, we can
    debate. You could look at people who served in Democratic
    Administrations like Fred Bergsten, who has written the same
    thing. Why don't we just make our case and we will let history
    judge. I think ultimately if you can support us on some of the
    efforts to move forward, then we will even do better in the
    future.
        Now, you and I may have some differences about some of
    these things. You and I may have some differences or Mr. Levin
    and I may have some differences. I think the steel 201 was an
    appropriate decision to make. I think it helped the industry
    get back on its feet. I would point out, Mr. Matsui, that steel
    imports to the United States actually increased last year from
    the prior year. We have still given the industry a chance to
    renegotiate and put itself back on its feet, and I think part
    of a successful trade policy is dealing with some of these
    domestic interests.
        I also think in the case of textile and apparel that if you
    actually look at the final bill that was passed from the Trade
    Act of 2002, it ended up far expanding our textile and apparel.
    You are focusing on one aspect of dyeing and finishing. You are
    right, that was a compromise and it was a compromise because we
    couldn't get enough Democratic votes. That is a reality. People
    who supported us before for some reason wouldn't support us
    this time even though we had environment and labor in the
    agreements.
        So, I hope we can move forward together, and let's debate
    it. I think part of the democratic process is debating who is
    moving forward free trade. All I will say is this: If you get a
    chance to travel, as I have, I have no doubt around the world
    that Africans, Latin Americans, people in East Asia, and indeed
    our European colleagues feel this Administration has put the
    United States back in the leadership role on trade. We will
    debate it.
        Mr. CRANE. Ambassador Zoellick, repealing ETI outright
    would adversely impact over 3.5 million U.S. jobs and would
    result in a rather substantial tax increase on U.S. businesses.
    Given that the United States has lost more than 2 million jobs
    since July of 2000 and the manufacturing sector has been
    particularly hard hit, wouldn't you agree that this is the
    wrong time to raise taxes on U.S. businesses?
        Mr. ZOELLICK. Well, I think, Chairman Crane, the question,
    as we have all talked about, is how we deal with the FSC
    problem. Mr. Rangel has now left, but since we talked about
    Cuba, I didn't get a chance to talk about his FSC position.
        I think that Chairman Thomas came forward and did a very
    courageous thing. We all know this is a tough problem. No one
    is going to like the solution. He came forward with a mark to
    try to suggest an approach to try to deal with it. Various of
    you have constituencies that want to try to change the issue in
    one way or another. What I have tried to do working with our
    people at Treasury tax policy is offer suggestions. I think,
    frankly, the Chairman's proposal makes a pretty good start.
    Now, is it the final one? I am not a tax policy expert to be
    able to say. I know that our Treasury people have made some
    positive comments about it.
        I do know this as the trade person: If we don't find a
    solution, some of your industries are going to start to face
    some of that $4 billion retaliation, and I have tried again and
    again to say that as straightforwardly as I can while trying to
    hold it off. Someday that day will come.
        So, this is one of the differences between our
    constitutional responsibilities. I can't pick the tax law. That
    is going to be up to this Committee to move forward.
        Mr. CRANE. Shouldn't we be turning over every stone in an
    effort to ensure that our response creates incentives for
    domestic job creation by U.S. companies and foreign
    subsidiaries operating in the U.S. territory?
        Mr. ZOELLICK. Well, I guess, sure.
        Mr. CRANE. I understand that you and Singapore are
    continuing to discuss the details for implementing the chewing
    gum provisions in the FTA, and I am concerned that a strict
    proscription requirement for chewing gum would not provide any
    commercially meaningful market access for consumer chewing gum
    and at the same time would give Singapore an excuse to allow
    sales of medicinal chewing gum such as nicotine gums only. What
    is the status of these discussions?
        Mr. ZOELLICK. Well, Chairman, as you probably know, the ban
    that Singapore put on dates back to 1992. It is not trade
    protectionism. It applies to oral gum from any country. For the
    United States, it is worth $2 million in annual sales. In the
    final stages of negotiation, we were able to pry it open a bit,
    as you and I have discussed. We checked with Wrigley before we
    did so, and we consulted them frequently. They supported that
    text.
        As your question suggests, I think Wrigley is now unhappy
    with the way that Singapore proposes to try to implement it.
    There are some 3,000 pharmacies and health clinics that the gum
    will be available for. We have urged Wrigley to go to Singapore
    to discuss the implementation.
        I will also point out that I checked into the situation of
    Wrigley with Singapore before this, and it turns out that when
    it sold gum in Singapore some 12 years ago, it did so from a
    plant in Singapore. My understanding is that if they want to
    establish that plant again and re-export from Singapore, the
    FTA would certainly not interfere with any exports of gum for
    the region.
        So, I wish we could have totally overcome it, Mr. Chairman.
    We have got an opening here in the process. It wasn't a
    particular aspect of trade protectionism, but it was something
    we did try to open up. At the end of the day, I hope at some
    point the ban will be removed.
        Mr. CRANE. In the past, I have strongly supported
    negotiations for FTAs with Egypt and New Zealand, and I
    understand the U.S. Chamber of Commerce recently included both
    countries in its top 10 most coveted bilateral FTAs. Do you
    have any plans to initiate FTA negotiations either with Egypt
    or New Zealand?
        Mr. ZOELLICK. Chairman, we have got a pretty full plate for
    the 200 people we have at USTR right now. We have had
    discussions with both countries. With Egypt, we have something
    called the Trade Investment Framework Agreement. Frankly, we
    have been trying to work with the Egyptian Minister of
    Economics and Trade, Minister Boutros-Ghali, to try to overcome
    some of the impediments that Egypt has had to a trade regime in
    the past. This involves some problems that U.S. investors have
    had. It also involves trying to implement some of their current
    WTO obligations, like in the customs area. We have actually
    worked with some of our aid people to try to connect our aid
    program to this as well.
        I have been encouraged, Chairman. We have made some good
    progress. Egypt has floated the pound. They passed a new
    intellectual property law. They are going to join the basic
    telecom agreement of the WTO. This is one that as time moves
    forward, if they continue to make progress, I hope we can try
    to figure out ways to support that. We will certainly look at
    the possibility of an FTA as a means to do that.
        Just to be fair with you and the other members of the
    Committee, one of the other issues here is a workload issue. We
    are at the point here where--if we are going to start others,
    we are going to either need some more resources from one place
    or another or be able to finish some we have got.
        On New Zealand, when we sent the letter to the Congress
    initiating the discussions on Australia, we noted that we would
    have consultations with the Congress about the interests with
    New Zealand. Your input and that of others is very valuable as
    we approach that.
        We have some sensitive issues with New Zealand, frankly,
    with the agriculture community, and part of what we have to do
    is build support for these agreements. So, I have talked with
    the New Zealanders about ways that we could try to strengthen
    the support going forward. So, it is a possibility, but it is
    not on the front burner at present.
        Mr. CRANE. I understand the Administration is seeking
    permanent normal trade relations for Russia, and given Russia's
    recent imposition of quotas and tariffs on rate quotas on
    poultry, beef, and chicken, why should Congress reward such
    actions by granting PNTR? Would granting PNTR now undermine the
    U.S. negotiating position on these and other issues in the WTO
    accession talks?
        Mr. ZOELLICK. Well, let me distinguish two points,
    Chairman.
        First, as I referenced in my opening comments, I think that
    the Russian action on poultry and some of the other meat issues
    is a bad sign, and I think they ought to recognize it. I think
    that it is certainly going to make our job harder doing
    anything with them in terms of WTO accession. I think if need
    be, at the appropriate point we ought to look at all options
    that we have with countries that aren't members of the WTO to
    respond appropriately.
        When you refer to PNTR, our focus is on Jackson-Vanik, and
    I think that is a different issue. This was referenced by Mr.
    Rangel as well. As I think you know, I served Secretary Baker
    from 1989 to 1992 at the end of the Cold War. Jackson-Vanik
    came up a lot during that period. I do think Jackson-Vanik is a
    vestige of the Cold War.
        Jackson-Vanik was passed to focus on immigration, primarily
    Jewish immigration from Russia. It has achieved its original
    purpose. Russia has been complying fully with Jackson-Vanik
    over the course of the past 9 years, and indeed it hasn't even
    been subject to any annual review during that process.
        For the sake of our WTO negotiations, we have leverage. We
    can say yes or no with them coming in, and so will others along
    the way. Here is the problem we now run into if we keep
    Jackson-Vanik on the books. To the Russians, it looks like a
    sign that we think the Cold War is still going on, because we
    have 28 other types of negotiations for WTO accession and we
    don't have anything similar that we are holding over other
    countries.
        So, we do believe we should repeal Jackson-Vanik, but I
    would distinguish that from saying that means they get an easy
    ride to come into the WTO. If they keep doing things like this
    on meat and poultry, it is going to be a long time, in my view.
        Mr. CRANE. The Trade and Development Act of 2000, which
    includes landmark reforms to improve trade relations with
    Africa and with countries in the Caribbean Basin region, was
    signed into law on May 18, 2000. The Treasury Department has
    yet to issue final implementing regulations to guide U.S.
    businesses and trading partners who are attempting to do
    business under these new programs.
        I think this is unacceptable performance that makes the
    United States vulnerable to charges that our Customs Service
    lacks transparency and fails to provide basic information to
    traders trying to comply with the law.
        Is there anything we can do to get the Treasury Department
    to issue the regulations?
        Mr. ZOELLICK. Well, I think your question will help, and I
    will try to follow up, Chairman.
        Mr. CRANE. Thank you, Mr. Ambassador. Mr. Shaw?
        Mr. SHAW. Thank you, Mr. Chairman. Mr. Ambassador, I want
    to talk to you for a moment about a trade dispute involving Rev
    Power Corporation, which was owned by one of my constituents,
    Mr. Robert Aronson. Many of my colleagues on this Committee are
    familiar with the facts of this dispute and have joined me in
    writing to ask the Chinese Government and the previous
    Administration for help in resolving this matter, but
    ultimately to no avail. I have even taken this up personally
    with the Ambassador from China myself.
        Allow me to briefly state the facts of the matter. In
    December of 1989, SFAIC, a Chinese-owned corporation,
    confiscated a factory owned by Rev Power. In response, Rev
    Power sought and in 1993 won a $4.9 million arbitration award
    from the Arbitration Institute of Stockholm against SFAIC.
        I have a longer statement, which I would ask be made a part
    of the record, that contains more of the facts of this case. In
    a nutshell, the Chinese courts refused to enforce the arbitral
    award, and the officers of the State-owned Chinese corporation
    then proceeded to deplete the company of its assets. This was
    flagrantly done despite the fact that China is required to
    enforce arbitral awards under the 1958 New York Convention on
    recognition and enforcement of such awards.
        This debt to Rev Power by the Chinese Government has been
    outstanding now for a decade and, with interest, exceeds $11
    million. I contacted the previous Administration about this
    matter in writing on four occasions, with little result.
    Moreover, during a previous hearing, I asked your predecessor
    for her personal assurance that the Office of the U.S. Trade
    Representative would vigorously pursue this matter with the
    Chinese, but nothing happened.
        I would ask that you personally look into this matter with
    the goal of resolving the problem. To be succinct, China is
    ignoring its international treaty obligations, thus hurting
    small business. I would urge you to confront your Chinese
    counterpart in hopes of rectifying this longstanding injustice.
        Mr. ZOELLICK. Thank you, Mr. Shaw. I will do so and will
    follow up with you to get the details.
        Mr. SHAW. All right. Well, I appreciate that. I would like
    now to switch for one moment to the Caribbean region. Tomorrow,
    I, along with Mr. Crane and Mr. Rangel and fellow Members of
    the House, Senator DeWine and Senator Graham in the Senate,
    will introduce legislation to amend the Trade and Development
    Act of 2000 by granting duty-free status to Haitian apparel
    articles assembled or knit to shape from fabrics and yarns from
    countries in which the United States has a free trade or
    regional agreement.
        The Haitian economy is in desperate need of a lifeline. I
    believe it is tremendously important that we seek avenues to
    promote job creation in Haiti, which, I might add, is the last
    least developed country in the Western Hemisphere. I would like
    your thoughts on the situation in Haiti and specifically the
    view of the Administration toward the crisis in Haiti.
        I personally believe that you cannot try to grow a
    democracy where you have no economy, and I think we need to
    work on both avenues in order to try to bring that country
    around.
        Just last night, a boatload of Haitians landed in my
    district, on Singer Island, which is up in Palm Beach County,
    and I think most of them were rounded up, if not all of them.
    It shows how desperate these people are, and we have seen the
    news clips of the ship arriving in Dade County, Florida, and
    these people jumping off of the boat and doing all of these
    things.
        Obviously, we have to control our borders, but we also, I
    believe, have to address the desperate situation in Haiti.
        Mr. ZOELLICK. Thank you, Mr. Shaw. I would be pleased to
    take a look at the bill after you introduce it and will be
    pleased to discuss it with you further.
        I think that the efforts the Congress has made in the
    Caribbean Basin to try to open U.S. markets have been very
    important for the reasons you say. It is not only a question of
    democracy. It is a question of survival for a number of these
    countries to be able to have some opportunity to make a
    livelihood.
        We have had a challenge in the apparel and textile area for
    reasons you know, and let me just take the opportunity to make
    a slightly larger point about this since that is what your bill
    deals with.
        There is no doubt that our apparel industry has struggled
    with some of the trade liberalization. I think there has been
    some 700,000 jobs lost over time. One of the points they have
    made to me is that what they want is reciprocity. In other
    words, they want other countries to open markets at least the
    same way we open, which strikes me as fair. So, one way we have
    tried to balance opening our side is to try to do a better job
    of getting others to lower some of their barriers.
        The other development, Mr. Shaw, is that we have tried to
    integrate some of our textile and apparel business more. Where
    a lot of our focus now is increasingly on the textile side, the
    apparel functions can be done in the Caribbean. I think that is
    an important development because, as you probably know, all our
    quotas come off in 2004. I think the most fierce competition is
    going to come from China, and then there is the question of how
    the United States and the Caribbean and Central America can be
    able to compete together.
        So, that is the context in which I would be pleased to look
    at the bill.
        Mr. SHAW. Thank you very much. Perhaps by getting a head
    start on this, we can at least get an industry that is started
    up in that part of the world prior to the Chinese invasion into
    the market, as you made reference to.
        Thank you, Mr. Ambassador. Thank you, Mr. Chairman.
        Mr. CRANE. Thank you. Mr. Levin?
        Mr. LEVIN. Welcome again, Ambassador. Your last comment, I
    very much agree with it in terms of integrating the Caribbean
    market in terms of competition with China and otherwise. You
    know, it makes me comment again on what you discussed and Mr.
    Matsui and you discussed. You said let history be the judge,
    and I simply want to urge that you let history judge.
        The comments about re-establishing, the problem with it is
    it draws the wrong line. The clear majority of people on this
    Committee and within this institution favor expanded trade. The
    issues now are within the ambit of the expansion of trade and
    how you do it and what the terms are.
        A number of us struggled hard on CBI to make it happen, and
    we had to overcome some opposition, to put it mildly. It wasn't
    so easy. It is not a question of our hurt feelings. It is a
    question of drawing the line correctly.
        A couple other quick comments. WTO decisions, I favored the
    Uruguay Round agreement, and I still do. I think, though, that
    when WTO wanders off beyond the language of the WTO, it begins
    to undermine support for WTO within this country.
        The FSC, very briefly, we said in the TPA, it set out a
    principal negotiating objective, and I think this was in both
    versions which granted TPA, but we had some differences. A
    principal negotiating objective of the United States calls for
    modification of WTO rules which favor nations that rely
    primarily on value-added service, sales, excise, and other
    indirect taxes so that U.S. companies are not competitively
    disadvantaged.
        I think what--and this has been the basis of the
    disagreement, I think. I think Europe is not mainly interested
    in compliance. They are mainly interested in the leverage it
    has given them. The question is how we react to that leverage.
        Quickly, on Chile and Singapore, I think the 90-day
    provision means the public should be able to participate for 90
    days. Only a few people have access to the documents that are
    held under secrecy, and that is what happened in previous
    cases.
        As to bilaterals, I agree with you, we should look at them.
    I think there needs to be a pattern, and also when they break
    new ground--they can break new ground, and we are going to talk
    about CAFTA in terms of breaking new ground.
        So, let me just ask you just a quick question about some
    old ground, and that relates to Vietnam. When you renewed the
    Cambodia-U.S. textile agreement--and I know there was some
    pressure on you not to do that. In fact, we urged you to
    reaffirm it. You cited the trade and labor standards in a
    complementary way. Yet we are now negotiating a textile
    agreement with Vietnam, and we have been told that USTR isn't
    pursuing--not the same but a similar or some meaningful kind of
    incentive provision with Vietnam. Vietnam competes with
    Cambodia.
        So, talking about pioneering or trying to break new ground,
    why the decision to leave that out of the negotiations?
        Mr. ZOELLICK. Mr. Levin, you really raise three points, and
    I will try to be brief on each of them.
        On the border tax issue, as we have discussed, one of the
    reasons why we have to proceed a little carefully with this is
    that it is in the exact part of the rules negotiation which
    your earlier statement said that you wished we didn't
    negotiate. So, it is a little bit of a tactical gymnastic
    exercise to introduce something in a negotiation which you
    represent we should have not started at all, but at a minimum
    then try to proceed slowly.
        We do still have time to propose it, and, frankly, one of
    the reasons we didn't go forward was, as we have had in our
    other exchanges, we were concerned that if the European Union
    thought that we would have that as an alternative to try to
    deal with the legislative route, it would actually move more
    quickly to retaliation, which none of us would want to have.
        Also, I would draw to your attention a paper I came across
    recently--from a professor from the University of Michigan, I
    might add, and Harvard Business School--that has pointed out
    that, first off, economic theory has always said that a value
    added tax (VAT) doesn't increase exports. These two professors
    decided to test it, and they took 132 countries in the year
    2000 and 168 countries between 1950 and 2000, and they found
    that a VAT was actually associated with fewer exports.
        Now, I realize there are many views, but I found this to be
    rather striking because, frankly, it makes me somewhat cautious
    to decide what we are going to give away to try to change
    border taxes that economic theory and now economic evidence
    suggests wouldn't do what you think it does. So, we are going
    to need to have a further dialog on that one, I hope.
        On the text, I received your letter on this, too, so I want
    to make sure the record is clear. First off, the text has been
    available to the Committee and the staff and the 700 cleared
    advisers, as I think you would acknowledge. We hope to make the
    Singapore text public in early March, and I hope the Chile text
    will be by late March or early April. So, this will mean 2 or
    more months before we sign the agreement or 3 or more months
    before Congress takes action. There is a reason for this. These
    are long agreements. They are 300 pages, plus 500 pages of
    annexes. We want to try to make sure we have got the minimum
    amount of differences with our counterparts and make sure the
    negotiators' intent is covered.
        You mentioned past practice, and you have talked frequently
    about the Jordan agreement. The Jordan agreement wasn't even
    made public until it was signed, so we will be about 2 or 3
    months ahead of the Jordan agreement.
        Mr. LEVIN. That is not a fast track----
        Mr. ZOELLICK. In the case of the Canada Free Trade
    Agreement, which I worked on, which was under fast track, there
    was a summary provided to Congress at the time, and about 2
    months later the text came. In the Uruguay Round, about 4
    months after notification it took for the details to come in.
        So, in summary, what TPA does--it doesn't address this
    point. It just says you make 90 days of notification. I think
    the key is you as Members of Congress and your staff have the
    text now. The cleared advisers that we work with, over 700,
    have the text now. The public will have it months before the
    President signs it.
        Mr. LEVIN. Why shouldn't the public have 90 days?
        Mr. ZOELLICK. Pardon?
        Mr. LEVIN. Why shouldn't the public have 90 days? You can
    time----
        Mr. CRANE. The time of the gentleman----
        Mr. ZOELLICK. I suspect the public will have more than 90
    days before the agreement is done.
        Mr. CRANE. We will let the Ambassador complete the answer.
        Mr. ZOELLICK. So, the question, Mr. Levin, is simply--you
    have got a balance here. We are trying to--for example, let me
    give you the set of problems that arise. You have a text that
    is developed that has been translated from English to Spanish
    and back to English. We want to make sure before releasing it
    to the public that we have got to try to get as many of those
    ironed out as possible. I don't have thousands of lawyers on my
    staff. We are trying to move through those agreements with the
    Chileans and Singaporeans. We will get the Singaporeans done
    first because it is all in English. It will probably take
    another month later for the Chileans.
        For the question of public transparency, as I said, this
    agreement will be public months before the President signs it
    and many months before the Congress considers it. So, I think
    there will be fair time for due deliberation, with due respect.
        As for your question on Vietnam--but, look, I agree with
    you, try to get them out as quickly as possible, Mr. Levin. I
    push on this as hard as I can because I want to get it out as
    quickly as I can. So, there is no effort to try to avoid it. It
    is just that legal work can get done at a certain pace, and
    believe you me, I hit this every day at my staff meeting to try
    to get it out earlier, as the colleagues behind will testify.
        On Vietnam, what we are in the process of trying to do is
    now negotiate the textile quotas. As we examined the
    differences between Cambodia and Vietnam, here were some of the
    conclusions we made.
        In the case of Cambodia, they actually had a pretty good
    labor law, so, the incentives are linked to performance under
    the labor law. Vietnam doesn't have that, so that is one basic
    problem.
        Another basic problem is that Cambodia, most of the
    industry is textiles and apparel. In Vietnam, our labor
    interests are much broader because textile and apparel is just
    one part of the industry. So, what we are discussing with the
    Vietnamese is a possible labor clause. What we are trying to do
    is meld it with some projects that we are doing with the U.S.
    Department of Labor and the International Labor Organization
    with the assistance of some NGOs. This is a good example of how
    we can try to bring NGOs into the process. We are trying to
    bring in Social Economy International and RAP and try to make
    this economy-wide, not just for textile and apparel.
        So, that is the approach that we are trying to take, and it
    frankly fits one of the points that you made before and made
    today, which is one size doesn't fit all. We will experiment.
    As you said, I thought the Cambodia approach worked well enough
    that we should continue it. Our judgment as of now is that the
    Vietnam approach needs a different solution.
        Mr. CRANE. The time of the gentleman has expired. Mrs.
    Johnson?
        Mrs. JOHNSON OF CONNECTICUT. Thank you. Mr. Zoellick, it is
    a pleasure to have you. It is a pleasure to have a chance to
    hear how many things you are moving forward and how you are
    regaining some initiative on trade issues. I am going to try to
    make my questions brief because I know my colleagues are--there
    are just many behind me.
        I, too, am concerned about the problem of the repeal of the
    ETI making major manufacturers in America permanently non-
    competitive in the international arena. So, what advances have
    you made--and this may overlap with Mr. Levin's question.
    Frankly, I couldn't quite tell. What advances have you made on
    what was a specific negotiating objective in TPA to modify the
    WTO rules that favor nations that rely on value-added taxes,
    sales, excise, and other indirect taxes? In other words, on
    that specific objective of changing the border tax adjustment,
    what progress have you made on that and its legislative
    history? If you could be brief, because I have two more
    questions.
        Mr. ZOELLICK. Okay. I think my answer to Mr. Levin, if you
    get a chance, will cover a lot of it. In essence, we are
    waiting in this area of the negotiations. We will have time to
    put something forward if you want, in part because if we put
    something forward, we think it should best match with whatever
    the legislative approach that Congress is taking is. Some
    people----
        Mrs. JOHNSON OF CONNECTICUT. I understand that. Some of us
    are very concerned that you are putting no pressure on Europe.
    This is the bottom line. You are putting no pressure on Europe
    on the things that they are doing that put our companies at a
    disadvantage, while we try to struggle through something that
    is going to put major manufacturers--not just aerospace but
    Caterpillar, Microsoft and stuff--at what will be, may be, and
    certainly for some of their sub-suppliers, may be a terminal
    disadvantage because the period of down will be so steep and
    prolonged.
        The other question I wanted to ask you along that same line
    was: When we did the bananas thing, Europe was given, I think,
    5 years to comply and a couple of waivers. Now, how can they
    expect us to comply overnight even if we do repeal the ETI and
    we get some protocol that we can all tolerate? You know, isn't
    there going to have to be a transition period at least as long,
    if not longer? This is a major, complicated part of our code
    affecting major interests, not affecting just bananas. So, if
    they had 5 years for bananas, are you prepared to work for a
    transition of some proportional and appropriate length?
        Mr. ZOELLICK. First, Mrs. Johnson, one big difference is
    the United States had retaliated. So, after we solved the
    bananas problem, we took off sanctions. The Europeans haven't
    put the sanctions on.
        As for a transition issue, I have heard that discussed, and
    I am willing to work with this Committee with any ideas that
    you try to come up and try to sell them. I think the Europeans
    know this is not an easy issue. That is what Commissioner
    Lamy's comments suggested today. I think if we can move in good
    faith toward a resolution, I am certainly willing to work with
    you together to try to sell whatever we can come up with. That
    has been part of my message.
        I don't have a tax policy solution for you. I am not the
    Assistant Secretary for Tax Policy. I know it is tough on many
    of the industries, although, as I said to Mr. Levin, there is
    certainly an economic question of whether it is bad for the
    U.S. economy. I know for individual companies it is tough.
        So, I am pleased to try to work with you if we come up with
    a solution that involves a transition.
        Mrs. JOHNSON OF CONNECTICUT. Then, lastly, would you be
    willing to meet with me and some of the small manufacturers
    that are steel users? I think it really is important, first of
    all, for us to think through how does our law, our trade law--
    because this was very useful in the eighties--give us the
    ability to moderate change during a period of surges in imports
    and things like that, to give our own manufacturers time to
    adjust? Then I think that some of you need to get a more vivid
    picture of what has happened to steel users as a result of the
    steel decision, and I hope their interests will be taken into
    account as you look at accelerating the re-evaluation of the
    steel decision.
        Mr. ZOELLICK. Yes.
        Mrs. JOHNSON OF CONNECTICUT. Thank you.
        Mr. CRANE. Mr. Houghton?
        Mr. HOUGHTON. Thank you very much. Just a quick question
    about the dairy business. The farmers in my area continue to be
    concerned about imports and various products through loopholes
    and trade agreements, things like milk protein concentrates,
    things like that. You don't spend a lot of time on this, but it
    is very important to our area because the dairy production is
    going down, farms are going out of business, and we just don't
    like that dumping practice.
        Mr. ZOELLICK. There are a couple of--there are different
    issues in dairy, and one of the things I was pleased about, Mr.
    Houghton, is that we have got the support of the dairy industry
    for our Chile agreement, because we tried to take account of
    some of their interests, but also, as I mentioned, account for
    U.S. standards with our exports.
        In the case of the milk protein concentrates, this issue
    has been presented to me in two ways, Mr. Houghton. One is that
    there has been some effort to try to change our tariff
    obligation, and the problem with that is we would have to
    compensate in some way, and I think other countries would
    probably want it in a similar area. So, I am not sure that gets
    you where you want to go.
        The second way it has been presented is that at times there
    have been discussions about the customs classification issue,
    and that is something that, again, really goes to the question
    of whether people are trying to circumvent with a different
    categorization, and that is something that I believe one should
    always try to look at. It is the U.S. Bureau of Customs and
    Border Protection, not me, but I would certainly be pleased to
    try to work with you on it.
        Mr. HOUGHTON. I would like to continue that. Thanks very
    much.
        Mr. CRANE. Mr. Neal. Oh, he is not here. Mr. McNulty.
        Mr. MCNULTY. Thank you, Mr. Chairman. Thank you,
    Ambassador, for your testimony today.
        Amo Houghton comes from the western part of upstate New
    York. I come from the eastern part of upstate New York. We all
    represent a lot of dairy farmers, and there has been a
    tremendous decline in the number of family farms in general in
    this country in recent years, and dairy farmers in particular.
    So, we have a deep concern about that.
        Now, the WTO ruled in favor of the United States over
    Canada regarding the dumping of over-quota milk by Canada into
    the United States, and you have hailed that decision as being a
    great victory for dairy farmers. So, I just wanted to ask you
    three quick questions on that.
        When do you expect the Canadian Government to comply with
    the ruling? That is number one.
        Number two, what penalties might the WTO assess against
    Canada for their practices?
        Number three, and probably most importantly, is there any
    chance at all that any of these monetary penalties from Canada
    milk dumping will find their way to the dairy farmers who were
    affected?
        Mr. ZOELLICK. Okay. Let me take the first and second
    question together. Under the WTO rules, we have the right to go
    to seek a retaliation. Obviously our first effort is to try to
    get them to change the practice.
        Mr. MCNULTY. Right.
        Mr. ZOELLICK. I think we are making headway with that, and
    I discussed this, I think, with my staff this week, and I think
    we have set the next couple months as a period for them to try
    to come up with a solution. I forget whether it was through
    April, but it is over the course of the next couple of months,
    and we will follow up with you on that.
        I believe there is willingness on Canada's part to end this
    export subsidy program, which is what we really want to try to
    do.
        Failing that, we go to the WTO and we get retaliation. The
    amounts, as I recall, were not that large in the larger trading
    scheme. I think they were $30 million or something, but we will
    get back to you on that, the amount of the subsidy. So, again--
    --
        Mr. MCNULTY. Are we willing to do that if----
        Mr. ZOELLICK. Oh, sure.
        Mr. MCNULTY. Okay.
        Mr. ZOELLICK. Oh, yes, definitely. Then the third point is
    that the way that the penalties work would be a withdrawal of
    trade benefits. So, the $30 million would be blocking their
    trade of $30 million. It is not $30 million of cash. That is
    different than it is under some other procedures that you might
    have under a WTO case.
        We will follow up with you, Mr. McNulty, but I think the
    Canadian Government has been pretty good about trying to come
    into compliance with these. It is a difficult political issue
    for them, but I think they are on the path to try to do that.
    Failing that, we won't hesitate to get retaliation.
        Mr. MCNULTY. Thank you, Mr. Ambassador, and I appreciate
    your commitment to helping to preserve these family farms. Mr.
    Chairman, I yield back the balance of my time.
        Mr. CRANE. Thank you, Mr. McNulty.
        Let me remind everyone that we have got to break at 1
    o'clock sharp, so let's try and keep the questions as short as
    possible and the answers as short as possible so as to
    accommodate everybody here at the dais.
        Mr. McCrery?
        Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Ambassador, on
    the softwood lumber issue with Canada, I understand that formal
    talks have been recessed. Is there any date at which those are
    to resume? Will there be informal talks while we are waiting on
    the formal talks to resume?
        Mr. ZOELLICK. Well, Mr. McCrery, let me explain where the
    state of that is. The private timber interests represented by a
    coalition went and got the countervailing duty suit, basically
    27 percent. It hasn't done more for them. It has probably done
    more for the lawyers. Lumber prices have still come down, and
    that is in part one of the unintended consequences, which is
    that it led to more cutting.
        So, what the U.S. Department of Commerce has sought to do--
    and we work closely with them on this--is to try to keep our
    eye on the underlying, long-term issue of getting the provinces
    to change the subsidies practices. So, the Commerce
    Department--and Under Secretary Grant Aldonas has had the lead
    on this; he has done a very good job--has tried to come up with
    what is called the standards for a changed circumstances
    review. That is proceeding, and he has taken input from our
    lumber interests and also talked to the provinces. They have
    very different practices. I think British Columbia is in the
    forefront of trying to do something, and they are the biggest
    player in this.
        What the talks were aimed at was another part of that,
    which would be if we actually could work out an interim
    agreement which might put on an export tax that, as they
    reduced, as they changed the practices, you would remove the
    export tax. That is where the gaps were too wide given sort of
    the export tax that our industry was seeking and what they were
    willing to pay.
        So, on the interim agreement, I expect discussions will
    continue, but I don't want to be over-encouraging because the
    gap was pretty far. Meanwhile, we will continue to work with
    the Commerce Department on this changed circumstances review to
    get at the underlying practices. It is a case where I think we
    have all learned that that action alone won't help the
    industry. We have to figure out a way to try to get at these
    underlying subsidy practices.
        Mr. MCCRERY. Thank you. I would like to bring up a topic
    that you haven't talked about much, which is prescription
    drugs, not in the context that you have discussed them, but it
    is my opinion that the United States is basically subsidizing
    much of the rest of the world with respect to prescription drug
    prices because prescription drug prices in many developed
    countries are controlled by the government, and whereas we have
    basically a free market here in the United States.
        So, I am just wondering if you have thought about that. You
    don't have to answer this now. I just want you to think about
    it. Could this be an issue that we could discuss with our
    trading partners in the future to try to get them to share some
    of the burden of providing prescription drugs to the world's
    population without us bearing most of the financial load?
        Now, a question on steel, and then I am going to yield to
    my good friend from Louisiana, Mr. Jefferson. I would like for
    you to be a little more specific to Mrs. Johnson's question. Is
    it your opinion that it is appropriate for the International
    Trade Commission's midpoint review to specifically include a
    public examination of the impact of the tariffs on steel
    consumers?
        Mr. ZOELLICK. There is a special process by which we can
    ask for this. I think it is called a Section 337, and the
    Chairman has inquired about this. I would like to further more
    about this with the Committee, but it is one that I am
    positively disposed toward. I think as a general matter, in
    looking at all these issues, you have to look at their overall
    effects on the economy.
        Mr. MCCRERY. Thank you. It would be helpful, I think, for
    the U.S. International Trade Commission (ITC) to include that
    in----
        Mr. ZOELLICK. Section 332. I am sorry. I used the wrong
    number.
        Mr. MCCRERY. It would be helpful for the ITC to
    specifically include that in their midpoint review. Now, for my
    last minute, I would like to yield to Mr. Jefferson.
        Mr. JEFFERSON. I thank the gentleman for yielding. I think
    as usual, though, he has covered the subject.
        My question was along the same line. In Louisiana, we have
    lost, to the extent we can trace it, something like 300 or 400
    jobs. Across the country, there are others who estimate that we
    have lost 200,000 jobs by steel users. Many people who are in
    the steel manufacturing business just have lost their jobs
    because of pressures created by the shortages that have been
    artificially created in this area. It is critical to us that
    this matter be looked at from the point of view of those people
    who are in the steel manufacturing business, the folks who lost
    their jobs, and the prices that have also gone up for people
    who have had to use steel products.
        All these are questions which I think ought to be covered
    in the ITC study, and I am glad to hear that you feel that it
    is important to recommend to the President that he ask the ITC
    to include this range of concerns in the study that it takes.
        Mr. ZOELLICK. Mr. Jefferson, I didn't quite say that, but I
    was leaning in that direction.
        Mr. JEFFERSON. You said you were leaning in that direction?
    Is that what you said?
        Mr. ZOELLICK. I said I didn't quite say that, but I was
    leaning in that direction in terms of the specific point about
    recommending to the President----
        Mr. JEFFERSON. Do you think it is a good idea or what?
        Mr. ZOELLICK. Well, I personally think it is a good idea
    that we as an Administration, whether or not the ITC looks at
    it, take account of the role of users of steel as well as
    producers of steel. I want to talk with some of you more about
    the 332 idea, but as I said--which would be to ask the ITC to
    take a look at it. That was done in some of the past 201 cases,
    with wire rod and line pipe and others. I have a positive
    attitude toward it. I am just not in a position to say it yet.
        Mr. JEFFERSON. The reason I----
        Mr. CRANE. The time of the gentleman has expired. Mr. Camp?
        Mr. CAMP. Thank you, Mr. Chairman.
        Ambassador, I am sort of following up on this same point,
    and I think we are all interested in this ITC study and the
    tariff impact on steel users, and I think particularly the
    automobile industry--I noted that the Wall Street Journal had a
    quote yesterday that said, ``More Americans lost their jobs in
    2002 to higher steel prices than the total number employed by
    the U.S. steel industry itself.'' If that is true, I think that
    is very troubling, particularly in the automobile industry.
        I guess I would urge not only a definition of steel user
    but also consumer, because, for example, what is this doing to
    the cost of a Ford Explorer? That is certainly having a direct
    impact on our economy, and I would be interested in the
    Administration taking a look at this ITC study, incorporating
    those concepts in it as well.
        Then I have another question because I know you have
    responded to this several times, but I am aware that at the
    Mexican border there are a number of rail cars that contain
    beans from around this country that have not been allowed to
    pass into Mexico. So, in essence, there is a closing of the
    border that I would think--that I understand violates the trade
    agreements between our countries. I understand you sent a
    strong letter to the Mexican Government about this situation. I
    just wondered if you could update me and the Committee on this
    issue and where things might be.
        Mr. ZOELLICK. Well, on the first point on steel, I take all
    of your points, and because Mr. Jefferson's time was cut off,
    let's talk about what you would like to try to have in this. I
    will make one general point on this, though, which is that it
    is interesting that steel imports to the United States actually
    increased a little bit last year from the prior year. So, the
    exemptions that we made and particularly for the Port of New
    Orleans, where a lot of the steel is coming up from Brazil in a
    slab form, I think that helped to at least alleviate some of
    this.
        On dry beans, I agree with you, and basically the best that
    we have been able to find out, allegedly it has been--the
    Mexicans told us it was because of some mixture of beans from
    other countries. Frankly, we are not persuaded. I am intending
    to follow up with the Mexicans, if I can, this week.
        Mr. CAMP. Okay. Thank you. Thank you, Mr. Chairman. I yield
    back.
        Mr. CRANE. Let's see. Mr. Becerra.
        Mr. BECERRA. Thank you, Mr. Chairman. Ambassador, thank you
    very much. It is a pleasure to have you here again. Let me
    begin by congratulating you on the work that you did on IP
    matters with regards to TRIPS and just in strengthening our
    ability to protect intellectual property. I think that what you
    did in the Singapore and the Chile agreements I hope will
    become a template that we can use in other agreements as well.
    It seems like countries are beginning to more and more
    recognize that if we are going to make progress just in general
    trade matters, we have to deal with intellectual property. So,
    I thank you for that.
        Mr. ZOELLICK. Thank you.
        Mr. BECERRA. I hope you will listen to the entreaties of
    many of the Members of this Committee and in Congress with
    regard to the issue of the Dominican Republic when it comes to
    a free trade agreement with Central America, and also with
    regard to New Zealand as we move forward with discussions with
    Australia. I believe a number of us feel very strongly about
    the necessity of bringing a country like New Zealand, which is
    so closely tied to Australia, and to us, into the mix, along
    with a country like the Dominican Republic, which says it
    really would like to go further than the CBI provisions in
    trying to deal with us on a trade basis.
        I would like to just mention--I have a question, though I
    will until the end, but I know we will run out of time if I
    don't mention these others points.
        On the labor provisions on Chile's and Singapore's free
    trade agreement, I still find it a bit unsettling that we have
    a two-tier process for dealing with our workers and Singapore's
    and Chile's workers when it comes to violations of the law and
    the agreement and how we go about ensuring that workers and the
    environment are protected, as opposed to, whether it is
    intellectual property or capital or other resources, we
    continue to provide more protections to property than we do to
    workers. I still feel that we should move a lot farther along
    in trying to ensure that countries abide by all their existing
    laws and our particular agreements. So, I hope that you will
    keep that in mind.
        I do, by the way, thank you for the work that was done to
    ensure that at least for Singapore and Chile, which do have
    fairly good labor laws, that they will be required to enforce
    those. I just hope that they don't regress.
        Prospects for a Central America Free Trade Agreement, I
    hope that you will try to strive for stronger provisions with
    regard to labor and environment within those negotiations,
    simply because we know that in Central America the labor
    standards are not where they are in Chile or in Singapore. We
    know that there are numerous problems, and if I have an
    opportunity, I will read some passages by our own U.S.
    Department of State Country Report on Human Rights for some of
    those countries and some of the other reports that have been
    issued that show that there is still a lot to be done in
    Central America when it comes to protecting workers' rights to
    collectively bargain and to deal with our environment.
        On immigration matters, it is a novel approach which I
    guess we find in the Singapore and Chile free trade agreements
    to now allow for a temporary professional worker provision
    similar to our H1-B visa program, where you can import workers,
    professional workers into this country. I hope we have a chance
    to examine that a little bit more because I know there is a
    great concern in this country that we will be displacing
    American workers. I am afraid that there may be some provisions
    that don't provide the same safeguards as even the H1-B
    program. I know that you worked hard to try to ensure that we
    had something similar to the H1-B program, so I thank you for
    that.
        I will just repeat what I said before. It seems like we are
    willing to protect capital, which we should, intellectual
    property, which we should, and even now go the novel step of
    including in a trade agreement immigration provisions which
    allow us to import workers into this country. We are still not
    willing to do as much for workers, protecting workers in either
    country, part of this agreement, in making sure that their
    rights are protected and they are not abused.
        So, I think we are moving forward in the right direction in
    some of these areas, but I would hope that we would be able to
    address some of these labor and environmental concerns.
        The question I would like to see if I can get an answer on
    is----
        Mr. CRANE. Quickly.
        Mr. BECERRA. It involves Trade Adjustment Assistance
    Program for Workers (TAA) and health coverage. Evidently, the
    Administration has reinterpreted what was to be a health system
    or a health coverage system which would provide tax credits to
    employees who might be displaced as a result of trade.
        According to the Administration, if you are out of work for
    3 months and you haven't had your health insurance continue,
    you may not be eligible to qualify for TAA tax credits to
    continue that health insurance, which I don't believe was our
    intent. Our intent was that if you get displaced and you had
    health insurance with your employer, you would continue to have
    it. If it takes more than 3 months to apply and be certified
    for TAA coverage, if you have been for more than 3 months
    without that health insurance coverage, you then lose your
    benefits. I am hoping you can give us some clarification on
    that.
        Mr. ZOELLICK. On the TAA issue, Mr. Becerra, that is run by
    the U.S. Department of Labor, but I try to follow up closely
    with them because I believe part of the terms of our overall
    deal was to have a good TAA package. So, I will follow up on
    that and try to get an answer for you on that. Two of the other
    points here, if I could beg your indulgence, that Mr. Becerra
    mentioned are ones that come up a lot, so I would like at least
    to try to give a quick sense of them.
        First, on the Chile and Singapore treatment of labor and
    environment, what I think we tried to do with this, Mr.
    Becerra, was to refine and customize what we did in Jordan, and
    let me explain what I mean by that. Contrary to what some
    people have said, we have the same basic procedures for all the
    disputes, so that means the consultations, the panels, the
    timeframe.
        Now, it is the case that for Chile, we set up a special
    process to get labor and environmental experts as part of the
    panel, which I think is a good thing, and in the case of
    Singapore some preference for their expertise, so that if it is
    a dispute you have got technical experts. For all these
    disputes, the first objective is to eliminate the violation.
        Now, again, we made a slight difference for labor and
    environment, and that is, in a trade dispute if you are found
    in violation, you can offer compensation. You can offer trade
    opening somewhere else. We didn't want to grant that for labor
    and environment because we wanted to solve the environment and
    labor dispute. So, that is a difference that I think works
    again in labor and environment's advantage.
        We also said that the labor and environment penalty will
    not be based on just the trade effects, because that is how you
    would do it under a trade issue, because we thought the trade
    effects might be too small. So, we wanted to actually put in
    some other variables that could deal with labor and
    environment.
        Then it is true that we come up with a monetary remedy
    first for labor and environment, but there, again, our logic
    is--our real focus was to try to channel the money back for
    labor and environment as opposed to just block some trade in
    some area. If they don't pay, then we can use the withdrawal of
    trade benefits to collect the money, again, so as to fix the
    labor and environmental problem.
        On the commercial side, you start out with withdrawal of
    trade benefits, but you have an option of a fine. So, that is
    why we tried to draw some parallelism here. We also added some
    improved transparency. So, we will have months, again, to look
    at this, but I actually think what we tried to do here was to
    customize and meet some labor and environmental needs in a more
    specialized way, and we partly did that because we are all in a
    learning process, and as you say, we would hope to try to apply
    some of this to CAFTA as well, the Central American. Along with
    it, as you properly point out, we want to try and we are
    working with them now to try to upgrade their labor standards,
    because we know in some countries like Guatemala we have had
    some problems in that.
        The temporary entry issue is another one that has been
    raised a lot, and here I really think it would be important why
    we are doing this. A lot of you represent service businesses,
    and we are hearing a lot more from service businesses. They
    need to get people in and out of countries. So, there are a lot
    of U.S. companies that wanted us to get temporary entry.
        We do not deal with citizenship. We exclude that. We do not
    deal with permanent residency. We do not deal with permanent
    employment. We had a lot of briefings and consultations, and
    there were three key points that came up to us that we managed
    to insert in the final negotiations. One is we do have a labor
    attestation, which we will model after the H1-B. We can work
    with the Congress on how we do that.
        When we work language in these agreements, we sometimes
    want to leave it a little looser, because what if Congress
    changes its mind in the future. We want to be able to
    incorporate that.
        Second, we put on numerical caps, 1,400 for Chile, 5,500
    for Singapore, and I might note in contrast we have no limits
    on people going to Chile and Singapore. So, in some ways, the
    H1-B is something you give the rest of the world, you got
    nothing else in return. Here we get full access to these
    countries with limits.
        Third, we also ensured that we could collect money, and I
    talked with Mr. Sensenbrenner about this, Chairman
    Sensenbrenner, not just to cover the costs but to cover some of
    the other expenses that you have used for H1-B. Here, again,
    the current amount is $1,000, but that law expires. So, we
    didn't want to just be linked to that law, so I think we have
    language here that, for example, some of that money is
    allocated to different uses. What if Congress changes the uses?
        So, I think we met those interests, but I know that they
    are points of sensitivity, and so I am glad you gave me a
    chance to expand on them.
        Mr. CRANE. The time of the gentleman has expired. Ms. Dunn?
        Ms. DUNN. Thank you, Mr. Chairman. Welcome, Ambassador.
        I want to ask a question on the Chilean FTA also. My
    understanding is that it includes language providing legal
    status on temporary copies of computer programs and other works
    currently protection under the Copyright Act. Since we are all
    aware that the Chilean FTA could potentially set a precedent
    for future trade agreements, I would like to get your thoughts
    or your comments on the intellectual property rights (IPR)
    provisions in the Chile FTA, and specifically on protection of
    temporary copies of computer programs.
        Mr. ZOELLICK. Okay. Well, as Mr. Becerra mentioned, I was
    particularly pleased at what we got in the intellectual
    property area. In the closing rounds of both these
    negotiations, I probably spent over half my time on these
    issues because it is a newer area.
        Just to give you some flavor of this, we have got an
    understanding in both cases that you will have statutory
    damages, because often it is difficult to prove the exact
    amount of damages. So, they were going to change their domestic
    laws for statutory damages. Criminal penalties for end user
    privacy, remedies for technical circumvention measure. Here we
    tried to build off the Digital Act passed by Congress. Also,
    provisions to ensure that any government software be used
    respecting IPR.
        Now, I think the issue that you referred to, if I
    understand it, Congresswoman, is the question of digital
    property protection where you don't have hard copy. This was
    something that, again, I think is a very major advance in that
    the question is: When somebody downloads something to their
    computer, whether business software or music or video, do you
    have an intellectual property right even though you have never
    created any paper aspect of it? We have established that in
    both these agreements because, otherwise, you could just
    network it out to somebody else.
        So, I think that is a very important development in both
    agreements. I hope it will be something we can spread
    worldwide.
        Ms. DUNN. Good. Thank you. I also want to ask you about an
    issue that we have discussed before, the TRIPS agreement out of
    the Doha Declaration, the TRIPS agreement that has to do with
    public health. Many of us are concerned about balancing the
    need for supporting developing countries' approach to solving
    their health care needs, but also we believe that the
    commitment to TRIPS is very important and should not be broken.
        You have been a great leader in helping the least developed
    countries get access to low-cost medicines for infectious
    epidemics like HIV/AIDS and tuberculosis and malaria. I am very
    concerned that we not dismantle the IPR by expanding this
    exception to other countries that should not qualify.
        So, the TRIPS Council was supposed to report back to the
    General Council before the end of last year on a solution for
    helping poor countries with access to drugs, and I am wondering
    if you could give us an update on the current negotiations on
    this issue.
        Mr. ZOELLICK. Certainly. This was a particularly
    frustrating issue because I feel there should be a resolution
    here, but you have a real problem of lack of trust with some
    poor countries that recall the suits brought by pharmaceutical
    companies against South Africa on HIV/AIDS, but on the company
    side, worry about some middle-income countries that, frankly,
    have stolen their patents.
        What we did at Doha--and this has been confused in some of
    the reporting--was to take the flexibility that exists in the
    TRIPS agreement and say that countries have the right to
    compulsory license certain drugs dealing with HIV/AIDS,
    tuberculosis, malaria, national emergencies, and it says public
    health crises. We would have been in a position to do that as a
    country if we needed to do it for anthrax.
        The one issue left over was what happens if you are a
    country that is too small to compulsory license in your own
    country, so you need to go outside. Then the problem that
    developed was that some NGOs in some countries said, well, gee,
    this covers everything. It covers obesity drugs. It covers
    health drugs but aren't ones related to infectious disease--
    asthma, cancer, whatever. Then some countries said, well, if
    some countries have this, we all need to have it, so expand it
    in two directions.
        This played into the distrust factor, I am afraid, and so
    what we tried to do was to clarify that it should be only for
    HIV/AIDS, tuberculosis, malaria, epidemics, but including ones
    that might arise in the future. That was not accepted by other
    countries, and so we basically did that by a moratorium to
    reassure countries. Now the question is: Can we partially get
    at this issue by clarifying that fewer countries would have
    access to it. I don't know, Ms. Dunn, because this is an issue
    that continues to plague us. It is not about HIV/AIDS. It is
    not about Africa now. I would certainly like to do our best to
    try to solve it, and I welcome any suggestions.
        Mr. CRANE. Mr. Collins?
        Mr. COLLINS. Thank you, Mr. Chairman.
        Mr. Ambassador, we hear a lot--and you brought it up a lot
    today--about free trade. There has been an issue of--instead of
    using the terminology of ``free trade,'' I have heard even you
    and I have heard the Secretary of Commerce use the words ``fair
    trade.'' I think that is more or less what the American people
    are looking for, too, the terminology of ``fair trade,''
    because fair trade is an exchange of goods between countries,
    not just a one-way exchange that sometimes free trade is given
    the image of.
        I don't know of anyone in the district that I represent
    that doesn't take a lot of pride in producing a product or
    delivering a service and hopefully that product or service will
    be purchased somewhere, whether it be domestically or in
    another nation. So, I would really like to hear you emphasize
    more the fairness than what we have done.
        Speaking of fairness, we are competing in a global market.
    You and I have had this discussion on a number of occasions.
    There are some areas that we are not competitive in with other
    nations, and one of those, as we have discussed--and it was
    part of the TPA Act--and that is dealing with currency. There
    is often concern that currency in other nations where we have a
    lot of trade, particularly China, is not valued at what the
    currency should be valued at. When we have the dollar that is
    valued more so higher than their currency, it puts an imbalance
    in the trade.
        The provisions in the TPA require that we discuss currency
    valuations up front, not as an afterthought or an after-
    reaction to a devaluation or contingency not valuing the
    currency as it should be. What have you done there? What is
    going on in the negotiations, the trade agreements that you are
    bringing forth now that involves currency?
        Mr. ZOELLICK. Well, Mr. Collins, this is an area that the
    President has been pretty adamant about currencies being the
    province of the Secretary of the Treasury just because you get
    people commenting on it, you send different messages.
        I would say at this point that clearly currencies do have
    an effect, and as we have seen, there has been some effect on
    the dollar, particularly with the euro, which I think will have
    some positive effect in terms of our trade competitiveness.
        In the case of China, the Chinese have fixed their currency
    at a certain level. There have been reports about whether that
    is over- or undervalued. In the 1997 financial crisis, it
    actually was a kind of point of stability for the region.
        The Chinese have talked about moving toward a more flexible
    exchange rate system at the appropriate time, and that would
    leave it more subject to market changes. I frankly don't expect
    that to happen in the near term because, given their economy,
    they don't want to have happen to them what happened to the
    rest of East Asia in 1997. It is a point I will just share with
    you that when Secretary Snow came on and we were talking about
    some of the issues on the agenda, I had mentioned, in addition
    to the domestic tax issues, this is one that we need to talk
    about for the Treasury to work with, because I know it affects
    a lot of industries.
        Mr. COLLINS. Well, it does and it is a big concern. I hope
    we are not going to be timid about our discussion of currency
    within our negotiating of trade agreements, fair trade
    agreements.
        One other area that I would like to bring to your attention
    is the area of poultry in Russia. You have been trying to,
    attempting to get a change of heart from the Russians about the
    poultry and what they have done with the moratorium on U.S.
    products for poultry. Georgia, the poultry capital of the
    world, is really hurting from the fact that they have an
    embargo on our poultry products.
        What is an update there?
        Mr. ZOELLICK. Well, first off, I appreciate your support on
    this. We have worked very closely with the poultry industry,
    and poultry, many people don't know, was I think our biggest
    export to Russia.
        When we worked with you before, we had a problem with
    sanitary and phytosanitary standards, which we achieved a
    resolution, and the Russians were here inspecting some of the
    plants. The most recent action has been that they have put on a
    safeguard, a limit of the amount, and they have done some
    things in the other meat quota area. This just happened a short
    time ago. We have communicated to them, but so has the rest of
    the world, our unhappiness with this. As I alluded in another
    question, my own view is that we need to get things opened up
    for these producers, or else we need to look at all the options
    that we have to let them know what the other side of the coin
    looks like.
        Mr. COLLINS. Well, there are a lot of jobs, particularly in
    the South, in Georgia, that pertain not only to poultry but to
    textiles, and I want to encourage you to continue to work on
    the efforts for our people.
        Mr. CRANE. Mr. Doggett?
        Mr. DOGGETT. Thank you, Mr. Chairman.
        Ambassador Zoellick, I never cease to be impressed by your
    ability to give lip service to openness in international trade
    while engaging in what seems to me to be utter contempt for
    openness, for genuine public access, and for meaningful public
    participation in the process that produces our trade
    agreements.
        If your accomplishments are so beneficial to American
    families, it would seem to me that you would want to share them
    with the public instead of to hide them. The specifics of these
    recent agreements that you negotiated are certainly not any
    secret to the foreigners you negotiated them with. They are not
    any secret to the 700 industry advisers that were selected to
    discuss this process with you. They have been kept secret from
    the American public, and even from most of their elected
    representatives here in the Congress who have little more than
    your happy talk about the success of the negotiations upon
    which to rely at this point.
        In the Singapore agreement, to be specific, the position of
    Singapore was basically that they would accept whatever you
    proposed on labor and environment standards and on ensuring
    that investment enforcement provisions don't undermine American
    health and safety laws. Unfortunately, what you offered was
    very, very modest in changing anything on these important
    topics.
        Typical is the provision that you testified about on page
    30 of your testimony that Chile and Singapore agreed to discuss
    ``appellate mechanisms in investor-state dispute settlement. .
    . .'' As best I can determine, what you secured through hard
    negotiation on this very important topic is to get exactly what
    we had before the negotiations began, and that is the right to
    talk about inconsistent investor-state decisions at some time
    in the future.
        Looking more closely at this issue with which you and I
    have had a long history, on March the 6th of last year I
    requested your office to supply all notices of intent to
    arbitrate under Chapter 11 of NAFTA, whether the filing
    culminated in arbitration or not. That is because too often
    these notices of intent are notices to intimidate government
    officials to abandon health and safety regulations, whether
    they lead to arbitration or not.
        On May 2, I reiterated my initial request, and no reply was
    received.
        On September 10, I met with you personally in the Capitol
    after you met privately with this Committee and asked that you
    act on that request.
        Finally, I received a letter following that meeting which
    did me the great service of printing the Web site of the State
    Department, which was available to any citizen, and totally
    ignored my request to get those notices that had not yet led to
    arbitration.
        I wrote you about that on September 30, and, of course, you
    have not responded to this date.
        I have a threefold question, because I believe this history
    of denial and lack of cooperation hardly demonstrates a
    commitment to what you call improving the transparency of
    investor-state dispute procedures.
        I realize that you and your staff view this as much less
    important than chewing gum in Singapore, but it seems to me
    that now a year later after my request, with the fast track
    debate over, that I would simply ask you if you will provide
    within a month a copy of all notices of intent to arbitrate--or
    all notices of intent to which USTR has access that have been
    filed at any time under Chapter 11.
        Second, I would ask you if I understood correctly your
    prior testimony that you committed that the American public
    will have at least 90 days to review the Chile and Singapore
    text before the President signs these agreements, and if I
    misunderstood, exactly how much time will the public have
    before the Presidential signature.
        Third, and finally, you ridiculed the concern over the
    privatization of services, but exactly when will USTR make
    available to the public what is apparently the response to the
    European proposal for privatization that it plans to make in
    March? When will that be available for the public to see?
    Similarly, when will the public see the position of USTR set
    forth on the investor provisions, the investor protection
    provisions that the Europeans have asked to have placed on the
    agenda at Cancun?
        Mr. ZOELLICK. Well, that is a rich list. I will do my best,
    Congressman.
        Mr. DOGGETT. Thank you.
        Mr. ZOELLICK. First, on the investor-state issue and on the
    environment and labor issue, we followed the guidance of the
    majority signed by the President in the TPA bill. For example,
    we have improved an investor-state--the transparent investor-
    state dispute settlement hearings, provisions to have
    elimination or deterrence of frivolous claims, including
    additional attorney's fees and costs in something like a
    12(b)(6) motion; efficient selection of arbitrators and
    expeditious disposal of claims; appellate body or similar
    mechanisms we have done through four different steps. I am
    afraid you are incorrect because we do have provisions that
    allow tying into future multilateral appellate mechanisms and
    oblige the parties to consider the establishment of an
    appellate body within 3 years.
        One of the issues we face, Mr. Doggett, is we have very few
    of these cases, and so in a case of judicial economy, there was
    a question of whether you should form an appellate body if you
    don't have any cases. We thought we could review that after 3
    years.
        In terms of the availability of the materials, they should
    be available to you as a Member of the Committee on Ways and
    Means.
        Mr. DOGGETT. Well, they have not----
        Mr. ZOELLICK. If I could keep going----
        Mr. DOGGETT. Let me----
        Mr. ZOELLICK. In fairness to me----
        Mr. DOGGETT. Let me interrupt----
        Mr. ZOELLICK. As a witness to this Committee----
        Mr. DOGGETT. They have not been made available.
        Mr. ZOELLICK. Mr. Chairman, could I answer?
        Mr. DOGGETT. You know they have not been--my question is
    just: Will you make them available? If you won't, just say you
    won't.
        Mr. ZOELLICK. You have asked so many things to make
    available. Let me--can I continue----
        Mr. DOGGETT. This is the same thing I asked you last
    March----
        Mr. ZOELLICK. To follow up on your questions, Mr. Doggett?
        Mr. DOGGETT. If you feel you can't make them available,
    just say so.
        Mr. ZOELLICK. Mr. Doggett, we gave you copies of all
    notices involving the United States. The State Department Web
    site has notices not involving the United States. So, that is
    not an area which I deal directly with. We gave you all the
    notices that we have involving the United States.
        You have given me a long list. Unless you prefer just to
    give a speech, I would like to try to continue to respond to
    your question----
        Mr. DOGGETT. No, just that one----
        Mr. ENGLISH. Regular order, Mr. Chairman.
        Mr. CRANE. Yes.
        Mr. DOGGETT. Just that one question. The notices----
        Mr. ENGLISH. Regular order, Mr. Chairman.
        Mr. DOGGETT. Arbitration has not been----
        Mr. ENGLISH. Regular order, Mr. Chairman.
        Mr. CRANE. Mr. Portman?
        Mr. PORTMAN. Thank you, Mr. Chairman. I have waited for a
    couple hours to have the opportunity to ask the Ambassador some
    appropriate questions about trade, but I feel that having been
    subject to that prosecutorial questioning from my colleague
    that I should give the opportunity to further respond to him.
    If we have time at the end, I have some questions, I would like
    to ask you. Please proceed to answer the questions from Mr.
    Doggett, should you----
        Mr. ZOELLICK. Well, in addition, as we were in the process
    of saying, Mr. Doggett, in terms of the variety of other
    provisions, for example, the investment provisions with the EU
    in the process of negotiations, all we have at this point is
    the mandate that came out of Doha. We have just had very
    preliminary discussions. I will point out that in none of those
    discussions are we looking at an investor-state mechanism. It
    is looking at a much more basic process of trying to create
    rules, for example, transparency and non-discrimination in
    investment.
        In the areas of our 90 days, I don't recall making a
    representation about 90 days other than the fact that TPA has a
    90-day notice requirement before the President signs. As I
    explained, I believe that we will make all the materials public
    in Singapore in early March, Chile will be done in late March
    or early April. So, since the signing, the earliest would be
    around May 1. That will have a time before signing, and we also
    would have a period before the Congress takes action. So, I
    think there will be plenty of time for public exposition, and I
    believe you and your staff should have availability now, as do
    the 700 cleared advisers.
        The reason is what I tried to say earlier. We have got a
    lot of pages of text. We are trying to reconcile any
    differences before we make it public. Some people have raised
    issues in the course that we have been able to try to clarify.
    So, it is a process that has been done before, and I think it
    is a reasonable balance in terms of trying to clarify the
    documents before public release. Frankly, some of you have
    raised issues that we are trying to deal with in the same
    course.
        So, I hope I have been able to answer many of your
    questions. It was a long list, and I apologize if I couldn't
    cover them all.
        Mr. PORTMAN. Mr. Ambassador, thank you for that answer, and
    I think you have shown to me an extraordinary detail of the
    subjects, command of the subjects. I am very impressed with
    your energy and enthusiasm you bring toward opening markets. It
    is not something that is shared by all Members of this
    Committee. The benefits of trade can only be obtained by the
    United States and our trading partners if we do indeed focus on
    opening markets and not creating more obstacles.
        Just quickly, I had a number of questions. I will change it
    and make it a few comments, if that is all right. The Doha
    Round, I congratulate you on what you have done on reducing
    agricultural subsidies, particularly establishing caps. I
    encourage you to continue to work on the issue of genetically
    modified organisms. I know we have not filed a case, but that
    is a very important one to our country, and I think it is one
    that also has implications for Africa and other less developed
    countries in terms of our food aid.
        With regard to FSC and ETI, I know you are not a tax policy
    person, nor should you take over Treasury's role. I encourage
    you to stay as involved as possible in that, and particularly
    looking at some of the more fundamental issues of border
    adjustability and really our international tax system. Our
    current system of worldwide taxation rather than territorial is
    a big disadvantage to our companies, and I think we ought to
    take advantage of this opportunity the Europeans have given us
    to look more carefully generally at our international tax
    system and coming up with more competitive ways, which are
    entirely consistent with WTO and which would help our exporters
    and our manufacturers in particular.
        We are honored in Cincinnati to have the latest round of
    the Central American Free Trade Agreements. We think it is
    going well in Cincinnati, but if you could possibly tell us why
    you think it makes sense to extend some of the NAFTA-type
    benefits to our Central American trading partners, why this is
    beneficial to the United States, that would be most helpful.
        Mr. ZOELLICK. Thank you, Mr. Portman.
        Well, with the Central American countries, we have a
    situation now where about 70 percent of their products come in
    duty-free under the Caribbean Basin Act. So, one of the things
    we would like to try to do is get better reciprocity. Many
    people are unaware, I think, that we already export about $9
    billion worth of trade to Central America, import about $11
    billion. So, this is an opportunity to improve markets for the
    United States.
        You might ask: Well, why do the Central Americans want to
    have a more reciprocal arrangement? That is where actually a
    number of the points that have come up in the discussion are at
    the heart of it, which is that they see this as a way of
    improving their standards, their rule of law. By opening their
    service market and integrating more effectively, they expect to
    get more regional growth. So, it is a good example of how this
    can become a win/win venture, and particularly in some areas in
    the apparel industry where the CBI has already developed some
    linkage between U.S. textile and their apparel to help compete
    with China.
        Also, there is another part, which is that these are
    countries that have fragile democracies. Blood has been
    spilled. I remember the negotiations in the late eighties and
    early nineties. It really is a chance to try to help strengthen
    the foundations for open societies, and that is where some of
    the other issues we will try to deal with in terms of
    environment and labor can also help us because I think we can
    strengthen the rule of law in those areas, too.
        Mr. PORTMAN. Thank you, Mr. Ambassador, Mr. Chairman.
        Mr. CRANE. Mr. English.
        Mr. ENGLISH. Thank you, Mr. Chairman. I will try to keep my
    questions brief.
        Mr. Ambassador, I met previously with your staff to raise
    issues about a very strategic sector in American manufacturing,
    and that is the tool and die industry, which is heavily
    concentrated in my district, Mr. Manzullo's district, and
    several parts of the Central States of the United States.
    Clearly, part of the problem facing the tool and die industry
    is the general slowdown in the economy, but a significant part
    is trade-related.
        Do you see an opportunity for your office to raise tool and
    die issues within some of the existing negotiations that
    currently you are participating in?
        Mr. ZOELLICK. Yes, Mr. English. I think they primarily
    would relate to the goods sector, and what we have been trying
    to do--this goes to the points about sort of fairness in
    trade--is that our tariffs are generally low in these areas.
    Many other countries' are still high. So, our proposals in the
    WTO to try to eliminate tariffs would frankly give us
    additional opportunities, but in the meantime, some of the free
    trade agreements that we have discussed also allow us to open
    markets where barriers are higher, for example, in Morocco,
    where you are helping us, where it is like a 20-percent average
    tariff.
        Mr. ENGLISH. Thank you. Let me say in response to some of
    the remarks earlier by my colleague, Mr. Levin from Michigan, I
    would like to offer the opinion that USTR, while it was a very
    strong agency under your predecessor, has, nevertheless,
    clearly been given the support in this Administration to go
    forward and to open some new areas. One of the areas where I
    think the Administration has been particularly proactive on
    trade has been steel. If I may say so, I recognize that the
    Administration has been willing to expend a great deal of
    political capital in support of the domestic steel industry.
    This has, I know, been controversial, but I believe it was very
    important for you to do it on behalf of the entire
    manufacturing sector in the United States.
        In your view, looking at the steel 201, do you believe that
    this investigation, which is now being reviewed by a WTO panel,
    was conducted in accordance with our international obligations?
    Do you believe that the remedy that the President provided
    comports both with our domestic law and with WTO Agreements?
        Mr. ZOELLICK. We do, and that is being contested in the
    WTO, and we will have determinations later during the course of
    the year. In the meantime, like you, I am pleased that the
    industry has taken some advantage of this, as you have seen in
    the case of ISG and Bethlehem.
        Mr. ENGLISH. Yes.
        Mr. ZOELLICK. Some of it has involved changes in labor
    contracts, which I have talked about with the head of the
    United Steelworkers. They are not easy, but they are the key to
    making this work.
        Mr. ENGLISH. At the Cancun ministerial, undoubtedly the
    issue of the WTO antidumping code is going to be raised again.
    I salute the Administration for its repeated commitment to
    defend our right to have antidumping laws and to police our
    markets.
        What do you anticipate will be the agenda on antidumping
    when the WTO has an interim meeting in Cancun?
        Mr. ZOELLICK. Mr. English, the way that we negotiated this,
    this actually is at a slower pace than some of the other items.
    It is what I cross-referenced in the other discussion. So, we
    are at an initial stage of identifying issues here. One of the
    issues that we have tried to identify is an offensive agenda
    because these procedures are increasingly being used against
    the United States. There were some 105 investigations of the
    United States in past years, and I have a list of items where
    we are concerned about the inconsistent procedures, the lack of
    transparency, no due process, public record, so on and so
    forth. So, one area that we are making--a point we are making
    is people have to clean up other operations before we go to
    other changes.
        Second, as you worked with us on, you can't just deal with
    the rules unless you deal with the underlying problem. So, we
    have to deal with some of the problems of subsidies around the
    world. This is also linked to the area of fish subsidies, so
    you find a country like Japan that is very interested in
    changing some of the rules but not in dealing with the whole
    question of fish subsidies. So, that is going to be connected
    to it.
        So, the heart of our position has been that we need to
    preserve the strength and effectiveness of U.S. laws in this
    area. At the same time, we are increasingly finding that U.S.
    exporters are also finding themselves vulnerable to some of
    these actions. We have had a number of actions with Mexico and
    agricultural exporters recently.
        So, we are going to try to push an offensive agenda, and,
    frankly, Mr. English, the point I just made a week ago was we
    are not going to be moving forward on these issues until we get
    the ones that have earlier deadlines, like agriculture, goods,
    and services, which are supposed to be done before Cancun.
        Mr. ENGLISH. Thank you. My time has expired, and I thank
    the Chair. I particularly thank you, Mr. Ambassador, for coming
    before our Committee and outlining such a strong vision for
    trade policy.
        Mr. CRANE. Mr. Weller?
        Mr. WELLER. Thank you, Mr. Chairman. Mr. Ambassador, it is
    good to see you this afternoon--no longer this morning. You
    have put some good time in today responding to our questions,
    and I thank you for that.
        I also want to commend you for being an effective spokesman
    for free trade and economic opportunity around the globe, which
    is good for Americans.
        I have several questions, and I am going to submit some of
    them in writing to you, and I would appreciate if you could
    respond in a timely way. I would appreciate that because my
    time is limited and I realize we are past the scheduled
    conclusion of our hearing.
        We have some negotiations under way, and many times when
    these negotiations are under way, some of the tough issues,
    particularly agriculture, which is important in portions of my
    district, as many districts across this country, tend to be the
    most complicated and the toughest issues. At the same time,
    with Australia and the upcoming WTO negotiations, we have those
    tough issues, but there are other issues such as the area of
    intellectual property and digital downloading and content
    issues and information technology issues. How can we ensure
    that we do not lose sight of those priorities as well as some
    of the tougher issues, that they are all included in a timely
    way and negotiations not get bogged down?
        Mr. ZOELLICK. Well, on the first one, the agriculture area,
    when I took this position, the President emphasized the top
    priority that he wanted to put to agriculture trade. So, that
    was the genesis of the proposals that we have come up with
    because we found that we could get support in the agriculture
    community to make cuts if we could get others to cut, too. So,
    my chief agriculture negotiator is in Geneva right now
    following up on this Harbinson paper. So, frankly, Mr. Weller,
    unless we get movement by Europe and Japan on these agriculture
    issues, I just see the thing not moving forward. We are just
    firm about that, and it is backed by the fact that there are
    many other countries, developing countries, Cairns Group
    countries, that are emphasizing the same point.
        As for intellectual property, we are making our biggest
    dent in this area with some of these bilateral free trade
    agreements, because the intellectual property rules really came
    out of the Uruguay Round, and since that was finished in the
    early 1990s, you have had a tremendous change in the whole
    industry. So, as I answered to Ms. Dunn's question, we are
    actually able to update the rules more effectively and then try
    to spread them through other agreements. So, that is one reason
    why I think we have gotten some strong support and appreciation
    for the headway we are making in these first agreements,
    because we hope to spread it.
        Mr. WELLER. Some of the questions I have to submit are
    similar to Ms. Dunn's questioning, so rather than duplicate her
    areas of interest, I will submit those in writing.
        Let me just conclude with just this last question. It has
    been suggested that some of our bilateral agreements, that the
    order of priority has been a part of our foreign policy rather
    than from a commercial and economic standpoint. I was just
    wondering: How do you set the priorities for determining which
    of our trading partners to initiate bilateral trade agreement
    negotiations? What type of input do you get from the private
    sector?
        Mr. ZOELLICK. Well, I appreciate your asking that because
    Mr. Levin, I think, or Mr. Matsui made a general reference to
    this, too.
        We can't do all at once, one thing we thought was important
    was to try to make sure we proceeded with different regions so
    we didn't look like we were just looking at one region. So, you
    will see we are moving ahead with Central America, Africa,
    North Africa and the Arab world, as well as Australia. We also
    have developed--as well as developing countries, to emphasize
    that.
        A third point is really their willingness to accept these
    changes. Our free trade agreements have a higher level of
    complexity than you get in the normal WTO negotiations, as my
    answer to your question on intellectual property succeeded. So,
    we need partners that are willing--not just say they want to do
    it, but are really willing to undertake these obligations and,
    frankly, as we talked about with the Dominican Republic, that
    can show us a little record as we move forward. The Dominican
    Republic has been strengthening its cooperativeness on this.
        We also look to how to give us leverage. So, for example,
    with the FTAA, part of the signal is we want to do it with all
    34 countries, but if some go slow, we will keep going with
    others. Part of it is also in the case of the Southern African
    Customs Union. This was a goal established by Mr. Crane and
    others as part of the AGOA bill, so it was urged by Congress to
    set a model to start to do free trade agreements with Africa.
    Frankly, the Caribbean Basin Act did the same thing for Central
    America. So, those two had urgings from Congress.
        So, it is a balance of that plus resources and willing
    partners.
        Mr. WELLER. Thank you, Mr. Chairman.
        Mr. CRANE. Ms. Jones?
        Ms. TUBBS JONES. Thank you, Mr. Chairman.
        Good afternoon. This is my first opportunity to make
    inquiry of you, and I want to focus in on the steel industry. I
    come from the city of Cleveland where steel was the
    undergirding of our economy for many, many years. I am
    wondering whether or not--and I am a supporter of steel
    tariffs, so I recognize to some extent it has an impact on
    other people using steel. I view it as an opportunity for the
    United States to come up with an overall steel policy, or how
    do we engage the steel industry in our country to be able to
    support it and at the same time move into the 21st century.
        Can you tell me, have you had any thoughts or discussions
    about what else do we do to assist the steel industry in this
    country from your perspective in addition to tariffs to help
    them be successful?
        Mr. ZOELLICK. Well, I am glad you asked that because when
    we launched the initiative, we actually had a number of prongs,
    and one that I haven't referred to today is we have also tried
    to deal with some of the issues on the international front.
    Both are questions of capacity, but some of the subsidies. We
    have made some progress in these discussions in the
    Organization of Economic Cooperation and Development on
    subsidies practices, and it is my hope that we may be able to
    take some ideas of disciplines and integrate them into the Doha
    negotiation we are discussing. So, part of it is an
    international component.
        A second part of it, as the question I think Mr. Becerra
    asked, is that it is a question of how you help with the
    adjustment, and part of this was done through the Pension
    Benefit Guaranty Corporation. There were also some provisions
    in the Trade Adjustment Assistance to help.
        Then I guess the one other point is that while we wanted to
    provide the opportunity, we felt it was important to let the
    private sector--and by private sector, I don't just mean
    business; unions--come to the conclusions themselves, because
    it shouldn't be directed by us. It should be something they
    come to. This is an area where particularly in the case of
    Cleveland, I am pleased to see the development with ISG. I know
    that following on the LTV this has not been an easy course, but
    I have talked to both the companies and the steelworkers
    involved, and they believe--and from what I have seen--they now
    have the basis of a competitive company moving forward.
        This is now spreading to Bethlehem, and now the question is
    whether some of these same ideas will also spread to National
    Steel, because there are now two bidders for National Steel:
    U.S. Steel and AK Steel.
        So, I guess what we were trying to do, Ms. Tubbs Jones, was
    to create a framework and a breathing space for this to happen.
    Like you, I believe it is starting to happen. So, therefore, I
    hope that we can count this as a success at the end of the day.
        Ms. TUBBS JONES. My final question--Mr. Chairman, I thank
    you for the time--is what do we do--I heard you mention the
    Pension Guaranty board. What do we do--or if this is out of
    your bailiwick, then say it is out of your bailiwick in terms
    of dealing with the other legacy cost of health care and so
    forth. Have you thought about that at all?
        Mr. ZOELLICK. It is generally out of my bailiwick, but the
    one thing that----
        Ms. TUBBS JONES. You have an idea anyway. Go ahead.
        Mr. ZOELLICK. Well, it did come up in the process of
    passing the Trade Act, and the point that Mr. Becerra
    addressed--and the Chairman has looked at some of these in some
    other areas, have focused on particular some ways to try to
    help on the health care side. Then also I think some of the
    work that Mr. Portman and--I am trying to remember who else was
    working on this. Mr. Cardin had focused also on some of the
    long-term pension issues, too.
        Ms. TUBBS JONES. Lastly, I would just ask you, as you are
    thinking through this process, to talk about or think about the
    impact that all of this has on small businesses operating in
    the city of Cleveland and across the country and how we can
    assist with that.
        I thank you, Mr. Chairman. I yield back the balance of my
    time. Thank you for testifying.
        Mr. CRANE. Mr. Hulshof?
        Mr. HULSHOF. Thank you, Mr. Chairman.
        Mr. Ambassador, thanks for your patience. About two and a
    half hours ago, the Ranking Member made a point to urge you to
    work in a bipartisan fashion, and I certainly share that
    thought. That would be the preferred path. Yet to somehow
    suggest or insinuate, as I think he did, that a 218-217 vote on
    the House floor somehow weakens our credibility abroad, I find
    that proposition to be absurd. I think TPA is a good example of
    something that was very divisive in the House, and yet a tool
    that you have been using aggressively, and I support you on
    that.
        Another comment I would make with Mr. Matsui taking you to
    task for your language of rebuilding America's leadership on
    trade, without making derogatory comments about your
    predecessor, Ms. Barshefsky worked well and we worked with her
    on this Committee. Yet I do commend you on your strong stance
    regarding agriculture. A former Member of this Committee, Mr.
    Wes Watkins of Oklahoma, and I were the ones, in fact, who
    worked to put a chief ag negotiator within your office. So, I
    want to commend you on the progress you have made.
        Having said that now, let me ask you about progress on
    biotechnology and phytosanitary guidelines. Again, each one of
    us has interesting issues that we bring to you, and this is one
    that you and I have talked about before, not only because corn
    and soybeans are a big part of my district, but because the
    University of Missouri in Columbia is a premier biotechnology
    institution, making some great strides in life sciences. I am
    increasingly troubled by the efforts of some of our trading
    partners to use biotechnology that has been scientifically
    proven to be safe as an excuse to block access of our American
    products abroad.
        No one wants an all-out trade war, and yet I am here to
    tell you publicly that I would support a formal complaint
    against the European Union or other trading partners because of
    their reluctance.
        So, a general question and then a specific one, the
    specific one first, perhaps. Were you able to get any sort of
    commitment from China as far as a final safety approval on our
    U.S. soybeans exported to China? Then the more broad question:
    What is the latest on biotechnology and phytosanitary
    guidelines? I will yield you the balance of my time to respond.
        Mr. ZOELLICK. On the first one, I got a positive response
    from the Chinese, and I raised the issue with both When Jiabao,
    who is the incoming Prime Minister, and also with my trade
    counterpart, and this is an issue, as you probably know, that
    the President raised with Jiang Zemin. What that means now, as
    you undoubtedly know, is that the Ministry of Agriculture said
    we need to do additional field tests. Therefore, the temporary
    permit system that runs through September, we are worried about
    whether that is extended or we address the issue in time so
    that there is not uncertainty. I pointed out, since I am from
    Illinois where soybeans are grown, that it takes time to grow
    the crop and you need some certainty as you move forward.
        In those meetings, again, I got a sense that the problem
    would be solved, but I never pocket it until I see it. As we
    followed up--my staff followed up as I went on to other parts
    of China--they affirmed that sense. So, we have got more work
    to do, but I come away with a positive sense on that one.
        Not so in the European context, and my views on this
    subject are very clear. I will take some note that I was
    pleased that the French Academies of Science and Medicine also
    supported the use of biotech and thought the moratorium should
    be lifted.
        Here is where I think we stand on this: There is a united
    sense that this is a moratorium that has been in place for four
    years. It violates the WTO rules. It violates the EU's own
    rules.
        My concern about this, frankly, increased even more when I
    saw not just its effect in Europe, but its effect of spreading
    around the world, in Africa in the most poignant case. You can
    see it in all different markets. It is being used as an excuse
    for protectionism in some cases, and in some it is just ill-
    informed fear.
        I adamantly believe that this development is important for
    issues of nutrition and health and environment and productivity
    for farming. Therefore, my sense is that we are agreed about
    the need to get the moratorium lifted. Right now we are working
    with other countries in terms of determining the best way to
    proceed. That has to be part of the strategy, which is that
    this is not just a question of bringing a legal case or not. We
    need to bring a public case, because we have to make the
    argument--and, frankly, this is some of the things that I have
    been spending my time doing--with scientists and others to
    explain that we are not forcing something on somebody. This is
    a tremendous opportunity for the world. One positive sign that
    I got after my earlier comments was I read a report of African
    scientists in Brussels that were saying the United States
    should bring a case; this is a terrible thing that Europe is
    doing to Africa. As I was coming back from China, there was a
    meeting of Asia Pacific Economic Cooperation countries in
    Thailand talking about biotech.
        So, part of what I think we have to do here, frankly, is we
    have got to reverse the momentum, and my view is that at the
    appropriate point, legal action should be part of that if the
    Europeans don't change. We also have to win the public debate.
        Mr. CRANE. Mr. Pomeroy?
        Mr. POMEROY. Thank you, Mr. Chairman. Mr. Ambassador, it is
    a pleasure to listen to you. You carry around more darn detail
    than I think any other official in Government who I have heard
    testify here, and I really admire that.
        Continuing with the questions of my colleague on
    agriculture matters in trade discussions, we very much
    appreciate the action brought by the USTR against the Canadian
    Wheat Board. If I understand, part of the process involves
    consultation between the governments so that indeed the first
    formal consultation has been held. Would you bring us up to
    date?
        Mr. ZOELLICK. You are right, Mr. Pomeroy. As you and I
    discussed, there are different elements of this, and one
    element is bringing the WTO case. We are in the consultation
    phase. We posed various questions. We are to get this
    information back from Canada. If the issue isn't resolved to
    our satisfaction, then we are free to go on to the next stage
    in the WTO process in terms of bringing the case.
        In addition, knowing of your interest in this, I thought
    you would be pleased that this paper that we referred to, the
    Harbinson paper, also took up this issue of State trading
    enterprises and monopolies. While it is, again, a draft paper
    the European Union hasn't agreed to, it shows another element
    of our strategy, which is it incorporated a number of the
    arguments that we said we wanted to make about the problems of
    State trading enterprises and using the Canadian case as an
    example.
        Then the third element is that we talked about filing of, I
    think it was, a countervailing duty or antidumping case, and
    that is also proceeding.
        Mr. POMEROY. So, the discussions to date--I have been
    amazed at how intransigent they have been, for example, keeping
    their books closed. Any headway that you care to illuminate at
    this time, or is it really at a point in the discussions where
    this may not be strategically beneficial to discuss in this
    forum?
        Mr. ZOELLICK. There is some discussion in Canada, as you
    are probably aware, in the Wheat Board itself, and there were
    some elections that this debate came up. So, I think we have
    stirred a little debate in Canada. I don't want to mislead you
    in terms of their willingness to change absent the pressure I
    think we need to put on them.
        Mr. POMEROY. Great. Now, as we proceed with Australia, what
    about the Australian Wheat Board?
        Mr. ZOELLICK. Well, in the letter that we sent to Congress
    putting out our objectives, we included that State trading
    enterprises part of it. It is my understanding--but we can get
    back to you--that the Australian enterprise has changed a lot
    of its practices. It doesn't operate in the same way as the
    Canadian Wheat Board in terms of it gives private sector the
    ability to go outside it. So, some of the concerns we have had
    in Canada do not apply to Australia. I do know we flagged it as
    an issue that we want to discuss in the negotiations.
        In addition, what you and a number have also raised is in
    the case of Australia we are also trying to focus on a lot of
    the sanitary and phytosanitary issues. We have made some
    initial headway on that, and that is going in parallel in the
    negotiations.
        Mr. POMEROY. Sugar--what is the state of sugar discussions
    with Mexico?
        Mr. ZOELLICK. We made some progress with the Mexicans about
    trying to arrange a balance here with our sweetener interests,
    because we have got cane sugar, beet sugar, but we also have
    high-fructose corn syrup that is being disadvantaged by now a
    discriminatory tax.
        We are not there yet, and, part of this is that we have got
    some balance on our own side in terms of the sweetener
    interests, which are slightly on different sides of the issue.
    One of the questions also would be sort of the term of this
    agreement and how it fits into the present arrangements,
    because, as you probably know, one of the dangers here is the
    tier two aspect of prices can start to kick in before long, and
    so you are going to have an aspect of Mexican sugar that could
    come in under tier two, even though we haven't--the tier one
    issue was never subject to dispute settlement.
        So, I would like to try to get this done. It is one that Al
    Johnson and I are continuing to try to work on. We have had a
    little bit of a throw-off in that my counterpart in Mexico, who
    was the Economic Minister, just became the Foreign Minister,
    but he is trying to keep the trade portfolio with him. So, I
    hope to follow up with him, if possible, even this week.
        Mr. POMEROY. I believe time is really of the essence in
    terms of joining the issues and getting something done. I am
    very fearful about the future without some agreement relative
    to domestic sugar production.
        Finally, with agriculture constantly being such a difficult
    component of your talks, trade adjustment assistance for
    farmers ought to be very helpful, I think, to you in terms of
    allaying some of the fears in farm country. The U.S. Department
    of Agriculture (USDA) is charged with bringing a package
    forward. They were to have had a report early in February.
    Nothing yet. I am wondering if you have an information in terms
    of USDA's advancing anything particularly relative to trade
    adjustment assistance for farmers.
        Mr. ZOELLICK. I don't. I remember Chairman Grassley had an
    interest in this, too, and since I am going to see him next
    week, I will try to check with USDA in the meantime.
        Mr. POMEROY. Thank you, Mr. Ambassador. Thank you, Mr.
    Chairman.
        Mr. CRANE. The time of the gentleman has expired, and, Mr.
    Ambassador, I think we have made your deadline. We want to
    express appreciation to you for your appearance today, and we
    look forward, in a pretty heavy schedule, to working with you
    throughout this entire session. So, thank you for being here
    today, and all our colleagues.
        With that, we stand adjourned.
        [Whereupon, at 1:29 p.m., the hearing was adjourned.]
        [Questions submitted from Messrs. Rangel, Herger,
    Jefferson, and Doggett to Mr. Zoellick, and his responses
    follow:]
                  Question Submitted by Representative Rangel
        Various countries have blocked the U.S. efforts to obtain
    commitments to liberalize trade in AV services in the WTO. Your office
    has had success in liberalizing trade in AV services in bilateral trade
    agreements. What is your strategy for moving this important issue
    forward in the multilateral arena?

        Response:

        Considerable controversy surrounded audiovisual (AV) services at
    the conclusion of the Uruguay round. Since then, we have worked in
    consultation with our industry to create a more receptive environment
    in which to negotiate AV and AV-related issues. In addition, in the
    current services negotiations, the United States is helping to build a
    coalition of developed and developing countries with strong commercial
    interests in liberalizing AV services. Such a coalition has the
    potential for becoming a force in preventing a de facto carve-out of AV
    services in the current negotiations.
        The United States is pursuing several avenues in seeking to
    liberalize AV services. First, as stated in the U.S. WTO negotiating
    objectives paper for AV services, our primary objective is to ensure
    ``an open and predictable environment that recognizes public concern
    for the preservation and promotion of cultural values and identity.''
    Consistent with this objective, we have requested that virtually all
    countries schedule commitments that reflect their current levels of
    market opening. Only in a few instances do we expect to request
    countries to remove existing restrictions on AV services.
        Ensuring that countries schedule existing regulation of the AV
    sector will serve to enhance transparency and preclude extension of
    existing regulations to new activities, which are important objectives
    given the rapid technological changes taking place in this sector. Such
    predictability is also important in a sector where timing is essential
    for commercial success. In addition, scheduling commitments in the AV
    sector will underscore that GATS disciplines apply to AV services, as
    they do to virtually all services.
        Second, we are seeking to increase demand for and access to content
    by encouraging countries to schedule commitments for transmission
    services (i.e., the pipes). As part of this effort, we are leading the
    way by offering to make new commitments in the GATS negotiations,
    including with respect to cable service.
        Third, in WTO accession negotiations, including those with the
    Baltic States and China, we have succeeded in obtaining commitments in
    areas related to, although not technically part of, AV services, such
    as ownership and operation of cinema theaters. While less sensitive
    than services considered ``audiovisual,'' such commitments are
    nonetheless important to our industry.

                  Question Submitted by Representative Herger
        Ambassador Zoellick, I want to commend you for the ambitious trade
    agenda you outlined in your testimony before the Ways and Means
    Committee. As you know, open markets are incredibly important to
    America's farmers and ranchers, many of whom sell as much as half of
    what they produce overseas. In my district in Northern California, we
    produce large amounts of rice, almonds, dried plums, and other products
    that rely on the elimination of export barriers--both tariff barriers
    and non-tariff barriers--in order to successfully export to foreign
    markets. I want to commend the Bush Administration and you personally
    for your efforts to lower barriers to the sale of our products
    overseas. I look forward to working with you and the President on the
    host of bilateral and multilateral Free Trade Agreements currently
    being negotiated.
        I also want to point out that there are sectors of the agriculture
    economy--such as the canned fruit industry for example--that have been
    forced to deal with extraordinary market distortions as a result of EU
    subsidies, and are now also facing an elimination of U.S. tariff
    protection against competitive suppliers. Many of us who represent
    producers or products that are highly sensitive to import competition
    believe it is important that our trade agreements recognize these
    products as import-sensitive and treat them appropriately.
        Ambassador Zoellick, is this view consistent with your negotiating
    objectives and could you please outline how USTR plans to address the
    concerns of import-sensitive products in future free trade agreements?
        Thank you for your responding to my inquiry.

        Response:

        With the Administration's support, the Congress appropriately
    highlighted in the Trade Act of 2002 (TPA) the need to give special
    consideration in trade negotiations to import sensitive agriculture
    products. Consistent with TPA, we have identified U.S. import sensitive
    products for which the U.S. International Trade Commission prepares
    probable economic effect advice prior to negotiations on market access
    and on which USTR consults with Congress throughout the negotiating
    process. In addition, a key negotiating objective in our multilateral,
    regional and bilateral trade negotiations, consistent with TPA, is to
    provide reasonable adjustment periods for U.S. import sensitive
    products. In the case of the U.S.-Chile FTA, for example, canned fruit
    products received the longest protection for phasing out the U.S.
    tariff. We will continue to ensure that special consideration is given
    to import sensitive agricultural products.

                 Question Submitted by Representative Jefferson
        The duty drawback program is the last remaining export promotion
    program that provides our exporters the needed competitive advantage
    for competing in the global marketplace against our trading partners
    who have significantly lower costs of production, even when we enter
    into free trade agreements. Thus, drawback would be phased out on its
    own as tariffs are eliminated through the negotiating. Could you please
    advise whether one of USTR's negotiating objectives during the
    negotiations for the CAFTA, FTAA and future trade agreements, will be
    the maintenance of full duty drawback rights for U.S. exporters in each
    FTA?

        Response:

        The United States and other countries have traditionally sought
    elimination or curtailment of duty drawback and deferral programs under
    free trade area agreements. Under duty drawback programs, duties on
    imported inputs are refunded when these inputs are used in a good that
    is exported, and duties are deferred when inputs are processed in free
    trade zones and then exported. During the NAFTA negotiations, there was
    a strong consensus in the United States, including among most Members
    of Congress and U.S. labor unions, that failure under the agreement to
    curtail Mexico's use of duty drawback and deferral programs would have
    an adverse impact on the United States by allowing Mexico to become an
    export platform into the United States rather than encouraging North
    American economic integration. The original U.S.-Canada FTA also
    contained such restrictions.
        In an FTA, companies that produce goods in the United States for
    sale in the U.S. market cannot benefit from the refund or deferral of
    duties on inputs, whereas (absent negotiated restrictions) companies
    could get such refunds if they establish in the partner country.
    Disciplines on drawback under an FTA are about ensuring an equal
    opportunity for domestic input suppliers in each of the countries and
    encouraging economic integration between the FTA partners. In addition,
    availability of duty drawback and deferral programs for third country
    inputs lowers the incentive to source inputs from the FTA partner
    country. Finally, with duty drawback and deferral programs in place,
    countries' incentives to lower their duties and open their economies
    are reduced, to the detriment of their populations. Since the United
    States has much lower average duty rates than other countries, our
    companies benefit from these programs less than their competitors in
    other countries.

                 Questions Submitted by Representative Doggett

    Doggett Request:

        1. LAll correspondence from NAFTA investors, their attorneys, or
    other representatives regarding an intent to file a claim under NAFTA's
    Chapter 11 against the United States, Canada, or Mexico.

             Zoellick Response: (check the box as appropriate)
                     LUSTR has none of these documents.
                     LUSTR has documents that fulfill this request,
                    but will not provide them to you because (all/some)
                    (circle one) are protected by secrecy obligations.
                    (Please identify the secrecy obligations.)
                     LUSTR will provide all the requested documents
                    to you by the following date: ------------------------
                    (note date, including year).

    Zoellick's Response 1:
        Response is being made under separate cover.

    Doggett Request:

        2. LAll documents transmitted with such requests (the notices of
    intent to arbitrate).

             Zoellick Response:
                     LUSTR has none of these documents.
                     LUSTR has documents that fulfill this request,
                    but will not provide them to you because (all/some)
                    (circle one) are protected by secrecy obligations.
                    (Please identify the secrecy obligations.)
                     LUSTR will provide all the requested documents
                    to you by the following date: ------------------------
                    (note date, including year).

    Zoellick's Response 2:
        LResponse is being made under separate cover.

    Doggett Request:

        3. LAll notices, regardless of whether arbitration was later
    initiated. (Those notices where arbitration was already initiated and
    that are already on the Department of State website need not be
    included.)

                     LUSTR has none of these documents.
                     LUSTR has documents that fulfill this request,
                    but will not provide them to you because (all/some)
                    (circle one) are protected by secrecy obligations.
                    (Please identify the secrecy obligations.)
                     LUSTR will provide all the requested documents
                    to you by the following date: ------------------------
                    (note date, including year).

    Zoellick's Response 3:
        Response is being made under separate cover.

    [For questions 1-3, an attachment is being retained in the Committee
    files.]

        4. LDetermining the total number of notices of intent to arbitrate
    under NAFTA.

           (a) LHow many total notices of intent to arbitrate have been
    filed under NAFTA Chapter 11?
           (b) LIn how many of these cases was arbitration later initiated?
           (c) LIf the USTR declines to provide separate numbers for (a)
    and (b), how can the USTR claim to be effectively monitoring NAFTA?

    Zoellick's Response 4:
        (a) LThirty-four Notices of Intent to Arbitrate have been filed
    under NAFTA Chapter 11.
        (b) L Arbitration was initiated in seventeen times.

        5. LOpen trade. In the February 26, 2003 full Ways and Means
    Committee hearing you indicated that the public will likely not get 90
    days to review the Chile and Singapore Free Trade Agreement before they
    are signed by the President, as was done with NAFTA. As you know, the
    time for meaningful public review if before the President signs because
    once the agreements are signed by the President the terms of the
    agreements are locked.

           (a) LI will guarantee public review of the U.S.-Chile FTA for:
    (check one)
                      90 days plus 2 weeks as was allowed for
                    public review of NAFTA
                      60 days
                      30 days
                      Under 30 days
                      I am not willing to make any guarantee of
                    public review.
           (b) LI will guarantee public review of the U.S.-Singapore FTA
    for: (check one)
                      90 days plus 2 weeks as was allowed for
                    public review of NAFTA
                      60 days
                      30 days
                      Under 30 days
                      I am not willing to make any guarantee of
                    public review.

    Zoellick's Response 5:
        The proposed U.S.-Singapore FTA was publicly released on March 7.
    The proposed U.S.-Chile FTA was publicly released on April 3. These
    agreements will be in the public domain for at least 1-2 months before
    signature and 3-4 months before Congressional action. As you may be
    aware, the U.S.-Jordan FTA was not available to the public until it was
    signed.

        6. LOn March 31, 2003, only 1 month from now, the U.S. response is
    due to EU proposal that could open public services, including municipal
    water service and the postal service, to foreign investors.

           (a) LHow long have you had EU request?
           (b) LI will guarantee public review of the U.S. response for
    (check one)
                      two weeks
                      one week
                      I am not willing to make any guarantee of
                    public review.

    Zoellick's Response 6:
        The U.S. presented its offer in the WTO services negotiations on
    March 31, the date mandated in the Doha Ministerial Declaration. The
    offer was made public and posted on USTR's website that same day.
        We have rejected any request by the EU or others to privatize
    public services. As I stated in October 2002, trade agreements are not
    the appropriate vehicles to pursue privatization in the United States.
    It is the responsibility of the Congress and other relevant Federal and
    sub-federal authorities to make determinations about any new
    privatization in the United States. In addition, in the ongoing GATS
    negotiations, we have not requested that our trading partners privatize
    any service sectors.
        With respect to municipal water supply, the offer specifically
    excludes water for human use. With respect to postal services, the U.S.
    offer applies only to services open to private sector participants
    (``express delivery services'') and does not give foreign service
    suppliers the right to acquire or invest in government monopolies
    supplying services. Specifically, the offer proposes no commitments in
    the monopoly area of the U.S. Postal Service and would in no way
    privatize any aspect of U.S. traditional postal activity.
        In preparing the offer, we conducted extensive consultations
    mandated by the Congress through trade advisory groups representing
    business, labor, environmental, and sub-federal interests. Moreover,
    because services often are regulated at the sub-federal level in the
    United States, we went beyond our statutory requirements and
    communicated directly with a wide array of sub-federal level officials
    to make them aware of requests we have received and to solicit their
    views. In January, we sent to all 50 states plus a number of elected
    officials and associations of state, county, and municipal governments
    a package of materials summarizing all requests, including the EU
    request, received as of that date that implicated state-level laws and
    regulations.
        We did not ask states to change their laws; we conveyed the
    requests and asked states to let us know if they had removed
    (liberalized) any laws or regulations for which we had listed GATS
    limitations on their behalf in earlier WTO negotiations. In those
    cases, we asked for their concurrence to include that liberalization in
    our offer. We have prepared our GATS offer based on states' responses.
    Where responses have not yet been received, we have not acted.

        7. When will the USTR release to the public the U.S. position on
    investor-protection provisions that will be on the WTO agenda for
    Cancun?

    USTR's Response 7:

        The United States has not yet offered an investment negotiating
    proposal for the Cancun Ministerial. The Administration plans to
    consult further with Congress, with domestic stakeholders, and with key
    WTO members before developing and presenting a negotiating proposal.
        During the Doha Ministerial, WTO members agreed that negotiations
    on investment would begin after the next ministerial. The Doha
    Ministerial Declaration also asked the WTO Working Group on Trade and
    Investment (WGTI) to examine seven issues in the period between the
    ministerials. These issues include the scope and definition of
    investment; transparency; non-discrimination; modalities for pre-
    establishment commitments based on a GATS-type, positive list approach;
    development provisions; exceptions and balance-of-payments safeguards;
    and consultation and the settlement of disputes between members.
        Several countries have presented papers to assist exploration of
    these seven issued in the WGTI. The United States has submitted only
    one formal paper. The United States took the position that investor
    protections should cover portfolio as well as direct investment.

        8. I understand that in response to a recent lawsuit under the
    Freedom of Information Act where the court ruled that USTR release
    certain documents from the U.S.-Chile negotiations, your office is now
    considering a move to classify such documents in the future in order to
    thwart the public's right to view them.

           (a) LCan you confirm that this is true?
           (b) LIf this is true, what documents are you considering
    classifying?
           (c) LPlease provide any USTR guidelines regarding when public
    access to documents should be barred by classifying them.

    Zoellick's Response 8:
        USTR's policy is to achieve the greatest possible degree of
    transparency in our trade negotiations while optimizing our ability to
    strike the best possible deals in America's trade interests. As I am
    sure you can appreciate, in order to achieve the most favorable results
    for America's workers, farmers, and firms in our trade negotiations, we
    need to be able to provide our trading partners with assurance that
    they can exchange views and proposals with us in confidence.
        For that reason, it is longstanding USTR practice to maintain the
    confidentiality of trade negotiating texts. As you may know, the
    Freedom of Information Act provides that the government may keep
    confidential a wide range of government records, including agency
    deliberative records. In a recent lawsuit, a Federal court ruled that
    the negotiating texts we exchanged with Chile could not be considered
    agency deliberative records. However, the court also upheld the
    longstanding principle that classified documents can be kept
    confidential, and specifically affirmed USTR's classification of
    documents related to our negotiations with Chile.
        The Executive Order governing national security information
    specifically contemplates that information sent to or received from
    foreign governments on a confidential basis may be classified. We have
    included with this response a copy of the Executive Order, and have
    noted the portion relating to ``foreign government information,'' for
    your convenience. Pursuant to the Executive Order, USTR classifies
    negotiating texts on the basis that they contain ``foreign government
    information,'' when it is our expectation and that of our trading
    partners that the texts will be kept confidential.
        At the same time, to achieve the greatest possible degree of
    transparency concerning our trade negotiations, USTR routinely makes
    available to the public summaries of our negotiating positions in every
    area of the negotiation. In addition, as the negotiations progress we
    consult with the Ways and Means Committee, other Congressional
    Committees of jurisdiction, the Congressional Oversight Group, the more
    than 700 members of our official trade advisory committees, and a broad
    spectrum of groups from the NGO and business communities. These
    consultations are precisely what Congress called for in last year's TPA
    legislation.

        9. Government Procurement. Would a U.S. law disqualifying a bid on
    a government procurement contract solely because the good was
    manufactured with child labor violate any existing trade agreement to
    which the U.S. is a signatory? Assume that foreign company bidders
    would be excluded from bidding if their goods were manufactured with
    child labor.

    Zoellick's Response 9:
        The main international agreement relating to government procurement
    in the United States is the WTO Agreement on Government Procurement
    (``the GPA''). Not all WTO members are Parties to the GPA. The GPA is
    binding only on WTO members that are Parties.
        Outside of the GPA, WTO rules expressly carve out government
    procurement. Thus, basic WTO principles, such as most-favored-nation
    treatment and national treatment, do not apply to government
    procurement, unless covered by the GPA.
        The GPA (Article III:1) commits Parties to ``provide immediately
    and unconditionally to the products, services and suppliers of other
    Parties offering products or services of the Parties, treatment no less
    favorable than: (a) that accorded to domestic products, services and
    suppliers; and (b) that accorded to products, services and suppliers of
    any other Party.''
        A law that prohibits a supplier of a GPA Party from bidding on a
    U.S. contract, based on the process by which the goods it proposes to
    supply were manufactured, could be interpreted as a violation of GPA
    Article III:1. That is because products of a GPA Party would be treated
    less favorably than like products of other GPA Parties or like products
    of domestic manufacturers. For this purpose, products would be compared
    based on their physical characteristics, not based on the processes by
    which they were manufactured.
        It is conceivable that the process by which a good is manufactured
    would be relevant to an analysis under Article XXIII:2 of the GPA. That
    provision is similar to GATT Article XX. Under certain specified
    conditions, it permits a GPA Party to impose or enforce measures
    ``necessary to protect public morals, order or safety, human, animal or
    plant life or health or intellectual property; or relating to the
    products or services of handicapped persons, of philanthropic
    institutions or of prison labour.''
        It might be argued that a prohibition on procurement of goods
    manufactured by child labor is designed to protect human life or health
    (i.e., the life or health of the children in the Parties where the
    goods are manufactured). However, Article XXIII:2 probably would be
    interpreted as referring the life or health of humans in the Party that
    is doing the procuring.
        Provisions similar to the foregoing GPA provisions are contained in
    Chapter 10 of NAFTA, as well as in proposed FTAs with Singapore and
    Chile.

        10. Would such a child labor law violate any proposed agreements,
    including under (a) the FTAA, and (b) WTO?

    Zoellick's Response 10:
        As noted in the response to question # 9, disciplines similar to
    GPA disciplines are contained in proposed FTAs with Singapore and
    Chile. In fact, Singapore is already a Party to the GPA. Thus, the FTA
    simply incorporates by reference disciplines that already apply between
    the U.S. and Singapore under the GPA. The U.S. is likely to seek
    similar disciplines in other FTAs, including the FTAA.
        Regarding the WTO, please see the response to question 9. It should
    be noted that, under a mandate contained in the GPA itself, that
    agreement is being revised for greater clarity. The basic disciplines
    described above are likely to be preserved.

        11. Investment provisions in Chile and Singapore FTAs. In your
    written testimony to the Ways and Means Committee, your comments
    concerning investment provisions in trade agreements did fully and
    completely address the congressional mandate in the Trade Act of 2002
    that investment rules must not grant foreign investors greater
    substantive rights that U.S. investors are afforded under U.S. law.

           (a) LPlease explain for each agreement how you ``clarified the
    obligations on expropriation'' and ``fair and equitable'' treatment.

    Zoellick's Response 11(a):
        The expropriation provisions in the Chile and Singapore FTAs
    contain several innovations to comply with the objectives set forth in
    the Trade Act of 2002:
        Only Direct and Indirect Expropriations Covered, Not Measures
    ``Tantamount'' to Expropriation: Some litigants in NAFTA cases have
    claimed that NAFTA's expropriation provision covers (1) direct takings;
    (2) indirect takings; and (3) a new category of measures ``tantamount''
    to expropriation. The Chile and Singapore FTAs eliminate this confusion
    and clearly state that only direct takings and indirect takings (i.e.,
    measures ``equivalent'' to direct takings) are covered. This is
    consistent with U.S. law and the traditional bilateral investment
    treaty expropriation provision, which has not been controversial.
        Scope of Coverage: Consistent with U.S. takings and due process
    protections, the Chile and Singapore FTAs clarify that only property
    rights or property interests in an investment are entitled to
    expropriation protection. This provision addresses the concern that
    panels may define certain economic interests that are not ``property,''
    e.g., market share, as an investment that can be expropriated. This
    provision is not in NAFTA.
        Regulatory Authority: The Chile and Singapore FTAs clarify that
    nondiscriminatory regulatory actions designed and applied to protect
    the public welfare generally do not constitute indirect expropriations.
    This is consistent with U.S. law. This clarification is not in NAFTA.
        Penn Central Factors for Indirect Expropriations: The Chile and
    Singapore FTAs state that, in determining whether an indirect (i.e.,
    regulatory) expropriation has occurred, panels must examine the factors
    cited by the U.S. Supreme Court in Penn Central, the seminal U.S.
    Supreme Court case on regulatory expropriation. Further drawing on Penn
    Central, the provision instructs the panel that the determination of
    whether an expropriation has occurred requires a case-by-case, fact-
    based inquiry. This provision is not in NAFTA.
        The fair and equitable treatment provisions in the Chile and
    Singapore FTAs also contain several innovations to comply with the
    objectives set forth in the Trade Act of 2002:
        Minimum Standard: In line with the NAFTA clarification, the Chile
    and Singapore FTAs make it clear that the general treatment protection
    prescribes ``the minimum standard of treatment'' under customary
    international law. The FTAs further clarify that this standard includes
    all customary international law principles that protect the economic
    rights and interests of aliens. This clarification ensures that the
    decisions of arbitration panels are rooted in international law
    principles that the United States has advocated and adhered to for
    decades, and are not based on subjective determinations of the
    arbitrators. This clarification is not in NAFTA.
        Due Process: The Trade Act of 2002 requires the Administration to
    seek to establish ``due process'' standards consistent with U.S. law.
    The Chile and Singapore FTAs define fair and equitable treatment to
    include the obligation not to ``deny justice'' in criminal, civil, or
    administrative adjudicatory proceedings in accordance with ``due
    process'' protections provided in the principal legal systems of the
    world. The due process protections in U.S. law are consistent with this
    standard. This provision does not appear in NAFTA.
        Define Customary International Law: The Chile and Singapore FTAs
    include a statement of the FTA parties' understanding that customary
    international law must be rooted in the practice of nation-states that
    they follow from a sense of legal obligation, and is not subjectively
    determined by the panel. Like the clarification of the minimum standard
    of treatment, this clarification ensures that the decisions of
    arbitration panels are rooted in international law principles that the
    United States has advocated and adhered to for decades, and are not
    based on subjective determinations of the arbitrators. This provision
    does not appear in NAFTA.

           (b) LDoes this ``clarification'' differ in any way from the
    obligations under Chapter 11 of NAFTA?

    Response 11(b):

        See answer to 11(a).

           (c) LDo the agreements include the recognition by a majority of
    Supreme Court justices that a regulatory action requiring the payment
    or expenditure of money cannot constitute a taking? See Eastern
    Enterprises v. Apfel, 524 U.S. 498 (1998), as confirmed in Commonwealth
    Edison Co. v. United States, 271 F.3d 1327 (Fed. Cir. 2001) (en banc),
    cert. denied (2002).

    Response 11(c):

        The Chile and Singapore FTAs reflect an understanding that
    determining when a person should be compensated for adverse
    consequences flowing from regulatory action is inherently a case-by-
    case, fact-bound inquiry. That understanding is consistent with
    principles of U.S. law as articulated by the U.S. Supreme Court,
    including in the Eastern Enterprises case. The Court, in this case and
    others, has shunned absolute, bright-line tests on this subject.
        Certain guiding principles on the question of compensation for
    regulatory action can be drawn from U.S. cases. Consistent with the
    objectives of the Trade Act of 2002, those principles have been
    incorporated into the Chile and Singapore FTAs. Thus, the FTAs direct
    arbitration panels to refer to those principles in determining whether
    a foreign investor is entitled to compensation by a host government.

        12. LTobacco.
           (a) LPlease provide a list of all tobacco-trade matters since
    July 2002 that have involved your office.
           (b) LPlease provide a list of all foreign governments in the
    above list.
           (c) LPlease provide a summary of the dispute involved for all
    the items in the above list.
           (d) LPlease confirm or deny that USTR consulted with any Federal
    agency regarding whether the policy would adversely affect public
    health.
           (e) LPlease provide me with a copy of the Federal agencies'
    recommendation regarding the effect on public health.

    Zoellick's Response 12:

        USTR's Office of Congressional Affairs will respond in writing to
    this request.

    [For question 12, attachments are being retained in the Committee
    files.]
    [Submissions for the record follow:]

                                             American Drawback Service, LLC
                                         Englewood Cliffs, New Jersey 07632

    Dear Sir or Madam,

        I wish to comment on any restrictions to drawback in free trade
    agreements. I am a licensed customs broker and the president of the
    American Drawback Service, LLC. I am also retired from U.S. Customs. I
    believe my viewpoint comes from a background of practical experience.
        It is now the common view of those involved with the NAFTA
    agreement that is poorly conceived, drafted, and implemented from an
    operational perspective. It is ineffective and cumbersome from the
    government view and actually keeps companies from taking full advantage
    because of its complexity. It actually seems to do more harm than good.
    Using that as basis for the future is a terrible idea, which should not
    be supported.
        I assure you allowing full drawback possibilities for shipments
    around the world regardless of any trade agreements only helps
    producers and exporters. This is historically accurate and especially
    important in these downturn periods. It is my direct experience with
    clients that Americans continue to have jobs with the refunds generated
    who would otherwise be unemployed. This is the historical benefit and
    it is especially true now. You should be looking to expand the
    possibilities, not diminish them. That would be the height of
    counterproductive and absolutely not the congressional intent.
        Furthermore, drawback is not a subsidy and has never been
    considered that since the First Continental Congress. It is fully
    sanctioned by the GATT/WTO and does not initiate countervailing duty
    actions by any trading partners. In my view, anyone who considers it a
    subsidy is simply not well informed. In fact, our companies would be at
    a disadvantage to foreign competitors without it.
                Very truly yours,
                                                             Tom Ferramosca
                                                                  President

             Statement of American Textile Manufacturers Institute
        This statement is submitted by the American Textile Manufacturers
    Institute (ATMI), the national trade association for the domestic
    textile mill products industry. ATMI welcomes the opportunity to offer
    the following comments on the Administration's trade agenda since
    international trade is the single most important variable affecting the
    domestic textile industry's well-being and future.
        Since the rise in the value of the dollar began in 1997,
    particularly against those countries that control or manipulate their
    currencies, the U.S. textile industry has undergone its most wrenching
    period of economic distress since the Great Depression. This has
    included:

         LThe closing of over more than 250 textile mills during
    just the last five years
         LThe loss of over 196,000 jobs during the same period of
    time
         LThe economic devastation of entire communities, most
    located in the Southeastern states, but in Mid-Atlantic and New England
    states as well.

        None of this is the result of the industry's failure to exercise
    good corporate stewardship. The American textile industry is the most
    modern, productive and efficient in the world. It is also one of the
    most forward-looking and export-oriented. From 1990 to 1997, U.S.
    textile exports increased faster than almost every other country's--
    indeed, they increased at such a rate that the U.S. textile industry
    now ranks sixth among world exporters.
        This growth was not accidental. Over the past two decades, the U.S.
    textile industry has worked within the framework of government trade
    policies that have directly encouraged the development of preferential
    trading areas for textiles and apparel within the Western Hemisphere.
    The industry supported the 807A program with the Caribbean, the Special
    Regime Program with Mexico and the NAFTA agreement. Over this time
    period, the industry also spent billions of dollars to modernize and
    improve its U.S. plants and equipment in order to integrate the U.S.
    textile industry into a new Western Hemispheric framework.
        As such, the industry fulfilled its portion of the bargain--to
    provide quality textiles at a competitive price to growing apparel
    sectors in the Western Hemisphere. Between the late 1980s and late
    1990s, trade in textiles and apparel between the United States and its
    immediate neighbors skyrocketed as textile exports from the United
    States topped $12 billion and apparel imports from Mexico and the CBI
    more than tripled in size. In 1996-97, the U.S. textile industry
    recorded two of the best years in its history.
    U.S. Textile Crisis
        However, since 1997, when Asian currencies collapsed and sent a
    shockwave of artificially low-priced textile and apparel products into
    the U.S. market, the competitive premise that the U.S. preferential
    trade areas were founded on has been severely shaken. With Asian prices
    for textile and apparel products dropping as much as 25% over the past
    five years and Asian imports more than doubling, U.S. textile
    manufacturers and workers have suffered extraordinary distress.
        The Asian currency problem has been greatly exacerbated by anti-
    competitive currency practices by major Asian exporting nations,
    particularly China, Taiwan, India and Korea. These countries, which
    accounted for $17 billion in textile and apparel exports last year,
    have illegally manipulated their currencies to gain an artificial
    export advantage. They have done so by stockpiling enormous amounts of
    U.S. dollars--over $500 billion since 1997--and thus flooding world
    markets with their own currencies, dramatically depressing their value
    and gaining an unfair advantage over U.S. domestic manufacturers.
        In the case of China, a study by the Manufacturing Alliance\1\
    concluded that China's currency was 40% undervalued. Other estimates
    regarding China have ranged from 15% to 50% while the other Asian
    countries are put in the 20% range. In any case, with U.S.
    manufacturing's return on sales running at 4% and U.S. textile's return
    even lower at around 2%, these currency schemes have put over one
    hundred thousand U.S. textiles workers out of their jobs over the past
    several years.
    ---------------------------------------------------------------------------
        \1\ For a copy of a report go to: http://www.mapi.net/html/
    prelease.cfm?release_id=393
    ---------------------------------------------------------------------------
        ATMI notes that such activities are not only anti-competitive but
    they are in violation of the World Trade Organization and International
    Monetary Fund rules. Further, and just as importantly, they are also in
    direct contravention of President Bush's own stated policy that
    markets, not governments, should determine currency exchange rates.
    Commitments of Assistance by the Bush Administration
        Since the textile crisis began, the Bush Administration has made a
    number of important commitments regarding the industry. On March 28th,
    2002, President Bush said that ``minimizing the impact of future trade
    deals on the domestic textile industry was at the top of the
    Administration's agenda.''
        On January 2, 2002, Commerce Secretary Don Evans said that the
    government ``understands that this industry is a cornerstone of the
    American manufacturing industry'' and reiterated that ``these aren't
    just words. You'll see through our deeds and works that we will
    deliver.''
        On January 26, 2002, Secretary Evans stressed that ``I don't
    believe there is a level playing field for the textile industry in
    America, and we want to help fix that.'' He promised that the industry
    ``will now get results from the federal government.''
        On February 4, 2002, Commerce Undersecretary Grant Aldonas
    reiterated the Administration's firm commitment ``to ensure that our
    textile and apparel industries can compete in global markets.''
        The domestic textile industry has been heartened by the many public
    statements of support by the Bush Administration. These statements have
    reassured the industry during this time of unprecedented distress that
    the U.S. government understands the industry's turmoil and is willing
    to help.
        To date, the Administration has acted to support the U.S. textile
    industry on a number of key issues, including: insisting on a yarn-
    forward rule of origin for free trade agreements; refusing to
    accelerate the phase-out of textile quotas; and not using the industry
    as a bargaining chip in the war on terrorism. These actions are
    important in assisting the U.S. textile industry during its time of
    need and the industry is grateful.
        However, in other areas that have an even greater impact on the
    industry's long-term competitiveness, not to say its very survival,
    government actions to date have been more disappointing. In particular,
    the government's tariff proposal for textiles under the Doha Round, its
    refusal thus far to act against Asian currency manipulators
    (particularly China), and its long delay in reacting to ATMI's request
    to utilize the China textile safeguard provision all pose issues of
    survivability for the entire industry and make strategic business
    planning difficult, if not impossible.
        ATMI looks forward to working with the Bush Administration and
    Congress on all of these issues in order to ensure that the U.S.
    government keeps its commitments to minimize the impact of trade
    agreements on the domestic textile industry, to level the unfair
    international playing field and to ensure that the U.S. textile
    industry can compete in global markets.
    Doha Textile Tariff Offer
        The textile tariff offer made by the U.S. government in the Doha
    Round of world trade talks has caused enormous concern in the domestic
    textile industry. Simply put, the proposal to bring U.S. textile and
    apparel tariffs to zero over a ten year phase-in period would eliminate
    the textile industry as a major manufacturing entity in the United
    States.
        As a corollary, it would also hand over the enormous U.S. textile
    and apparel market to China and devastate the enormous apparel
    industries that have been built up in Mexico, Central and Latin America
    under preferential trade programs and partnership arrangements that the
    United States has actively promoted for almost twenty years. It would
    also devastate the rapidly growing African apparel industry, which also
    depends on tariff preferences to remain a viable exporter to the United
    States.
        Thus, while the tariff proposal appears to require genuine
    reciprocity from exporting countries, by removing all tariffs on
    imported products as well as all preferential tariff benefits for
    Canada, Mexico, Central and Latin America and Sub-Saharan African
    countries, the proposal also literally sentences textile and apparel
    manufacturers in those countries to extinction. Reciprocity is of no
    benefit if your factory has gone out of business and you have been
    forced to lay off all your workers.
        For those who study textile and apparel trade, there is little
    question that if this proposal becomes a reality, China, which is
    already by far the world's largest textile and apparel producer, would
    gain control of the world's largest consuming market for textiles and
    apparel. In developed country markets such as Japan and Australia,
    where duties are currently close to zero and there is no quota
    protection, China already controls more than 75% of the import market
    for textiles and apparel. No country, no matter how low its wage
    rates--not Bangladesh, India, Vietnam or Pakistan--has been able to
    compete with China at the scale and range of textile goods that China
    produces.
        Closer to home, in textile and apparel product categories recently
    decontrolled from quota, China has quickly moved to gain the lion's
    share of trade. Of the five categories of products\2\ in which China
    has caused serious damage to U.S. textile manufacturers, in just twelve
    months time, China has soared to a level of market share now twice as
    large as its next largest competitor. China has accomplished this while
    competing head-to-head with some of the largest exporting countries in
    the world, such as Thailand, Malaysia, India, Pakistan and Indonesia.
    ---------------------------------------------------------------------------
        \2\ Brassieres, dressing gowns, gloves, knit fabric and luggage.
    ---------------------------------------------------------------------------
        None of this should come as a great surprise. A United States
    International Trade Commission study on the impact of the Uruguay Round
    in 1994 concluded that, even with paying full tariffs, once China's
    quotas were removed it would quickly trounce much of its competition.
    Other studies--by Nathan Associates, by the United Nations, and by
    China itself--have come to the same conclusion.
        Thus, if China is a severe threat under a full duty regime, how
    much greater a threat will China be if it gets zero duties? As a start,
    such an occurrence would take away the advantages we have given to the
    preferential trade countries of Mexico, Central America and the
    Caribbean, the Andean, Israel and Jordan and those of Sub-Saharan
    Africa, and instead put them on an equal footing with the world's
    greatest textile and apparel power. As mentioned earlier, none of these
    countries--or in fact any country--has been able to compete with China
    when duties are reduced to very low levels.
        Given the cool reception in Geneva since November to the U.S.
    textile proposal, ATMI hopes to work with the Administration to craft a
    new proposal that fulfills the President's commitment to minimize the
    impact of future trade agreements on the domestic textile industry. In
    this context, ATMI has suggested to the U.S. government that other
    countries should first reduce their tariffs to U.S. textile tariff
    levels before proceeding to a sectoral negotiation on individual tariff
    rates. In addition, countries would be required to remove all their
    non-tariff barriers with two years.
        A sectoral approach would also permit the consideration of such
    issues as WTO rules and disciplines on intellectual property for
    textile designs and copyrights, and enforcement of prohibitions against
    duty evasion and other customs fraud. These issues will not be
    negotiated elsewhere in the WTO and only a sectoral approach will
    permit them to be considered.
        ATMI's approach has the benefit of enabling countries with
    preferential access to remain competitive, and it addresses existing
    inequities in market access while meeting the U.S. government's
    commitment `` to ensure that our textile and apparel industries can
    compete in global markets.''
    China and Other Asian Currency Manipulators
        A key, if not the key, component in the economic distress
    experienced by the domestic industry, has been the sustained
    depreciation of Asian currencies against the U.S. dollar. This decline
    in currency values, which has averaged 40% over the past five years,
    has allowed Asians to drop their export prices by as much as 25% and
    caused an enormous surge in imports from Asia. The end result has been
    the closure of over 150 textile plants in the United States and the
    loss of over 100,000 textile jobs in just the last two years.
        While other currencies--notably the euro--have strengthened
    recently against the dollar, the Chinese yuan, the Korean won and the
    Taiwan dollar have remained dramatically undervalued. All three of
    these major exporting countries manipulate their currencies to gain an
    anti-competitive advantage over U.S. manufacturers. These countries
    have compiled over $500 billion in foreign reserves over the past five
    years; China, which pegs its currency at 8.26 yuan/$1, has accumulated
    almost $275 billion and is adding to its cache at the rate of $6
    billion per month.
        The effect of these reserve accumulations is to make U.S. dollars
    scarce vis a vis these Asian currencies, thus driving down the value of
    Asian currency vis a vis the dollar. The end result has been record
    imports from those countries of manufactured goods at artificially
    depressed prices. Chinese exports of all goods to the U.S. jumped 20%
    last year with China, at $102 billion, surpassing Japan as the single
    biggest slice of the U.S. trade deficit. According to the MAPI study
    mentioned earlier, China benefits by getting a 40% subsidy on the goods
    its exports from its undervalued currency. And as shown earlier, this
    outright subsidy becomes the basis for making China literally
    unbeatable in world textile and apparel markets.
        ATMI, as well as the National Association of Manufacturers, among
    others, has pressed the United States government to take action against
    these anti-competitive currency practices. ATMI has noted that these
    activities are in violation of both the WTO and the International
    Monetary Fund rules as well as in direct contravention of the
    President's own stated policy that governments should not intervene in
    currency markets. However, there has been no attempt by the Treasury
    Department, the Commerce Department or the United States Trade
    Representative's Office to confront this behavior, which has been so
    costly in terms of U.S. jobs.
        A comprehensive, effective trade policy must react to currency
    manipulation, particularly to the extreme degree it is being practiced
    today by major trading partners. When currencies trump the effects of
    tariffs by multiples of degrees, then trade policy must recognize and
    confront the fact of manipulation. Indeed, while Ambassador Zoellick is
    now required by law to take currency movements into account when
    negotiating agreements under the Trade Promotion Authority provisions
    of the Trade Act of 2002, we have not yet seen any actions by our
    government to address the inequity that exists. ATMI continues to urge
    that the government take on, as a high priority, the elimination of
    illegal currency manipulation to gain export advantage. Until this
    manipulation is stopped, it will be impossible to assert that a level
    playing field exists for U.S. textile companies (or for many other U.S.
    industries).
    Special China Textile Safeguard
        The special China textile safeguard was agreed to by China as part
    of its WTO accession package and was designed to protect domestic
    textile manufacturers from surges in imports from China once quotas
    were removed. However, over the past twelve months, imports of
    decontrolled Chinese goods have increased at the fastest rate in
    history--a 600 percent increase--and yet the U.S. government has thus
    far refused to invoke the China textile safeguard.
        This lack of response comes at a time when U.S. textile mills are
    still closing, U.S. textile jobs are still being lost and the U.S.
    textile industry is still under great distress. It is occurring when
    China, in the space of single year, has overtaken Mexico and Canada to
    become far and away the biggest exporter of textile and apparel
    products to the United States.
        It is difficult to conceive of a more direct, clear, and specific
    instance of the need for the U.S. government to act to ``minimize the
    impact of trade agreements on the domestic industry''--yet, despite
    repeated pleas on behalf of the American textile industry for the
    government to fulfill its commitment, the China textile safeguard
    remains unused.
    Industry Outlook Uncertain
        Because of this triad of issues--the need for the government to
    work with ATMI to modify the U.S. tariff proposal, the government's
    failure to react against blatant and illegal currency manipulation by
    leading Asian exporting nations and, finally, the government's failure
    to utilize the very tools that it negotiated in the China WTO accession
    agreement--the American textile industry remains concerned about its
    long term outlook. Indeed, while the government is to be praised for
    the positive actions mentioned earlier, ATMI is worried that these
    benefits could be entirely washed away by a flood of duty-free,
    currency-depressed imports from China if they are not restrained by use
    of the textile safeguard.
    Implementation of Chile and Singapore Free Trade Agreements
        Regarding the Chile and Singapore Free Trade Agreements, the
    potential benefits to the domestic textile industry are welcome, but
    are likely to be small. The purchasing power of both countries is less
    than that of New York City. Furthermore, since Singapore lies at the
    crossroads of the various large, export-oriented Asian economies--
    China, South Korea, Taiwan, Indonesia, etc.--it is doubtful that the
    United States will develop significant sales opportunities in
    Singapore. For the record, U.S. exports of textile products to
    Singapore and Chile last year were $41 million and $23 million,
    respectively. Nonetheless, U.S. textile companies will work to take
    advantage of the agreements' yarn-forward rule of origin and will seek
    customers in both markets.
    Future Trade Agreements
        As models for future free trade agreements, ATMI supports the
    inclusion of the NAFTA yarn-forward rule of origin. This rule, which is
    not only in the NAFTA agreement but also exists with respect to the CBI
    and Andean preferential trade areas, ensures that free trade agreements
    benefit manufacturers in the participating countries or region, rather
    than third country manufacturers. ATMI has consistently opposed the
    incorporation in free trade agreements of relatively (to the trade)
    large exceptions to the rule of origin in the form of tariff preference
    levels (TPLs), and has urged the government not to include these in
    future agreements. ATMI believes that a short supply provision
    adequately provides the flexibility needed to address inputs
    unavailable within any free trade region.
        ATMI notes with concern that the U.S. government has failed to
    include a ``kick-out'' clause in free trade agreements already
    negotiated. Such a clause would permit the United States to withdraw
    tariff benefits if a country did not adequately enforce its textile
    rule of origin. Currently, there is no means to force a country to
    actually enforce its textile rule or other agreed upon measures. This
    has been a long-standing problem regarding quota agreements and is a
    particular concern regarding Singapore, which has a long history of
    permitting illegal transshipments through its territory.
        In sum, ATMI has commented often to various branches of the
    Administration and Congressional committees with regard to the
    essential elements of any and all free trade agreements, and ATMI will
    review each future trade agreement with these objectives in mind. These
    essential elements include:

        1. LStrong rules of origin which discourage, to the greatest extent
    possible, the use of raw materials, semi-manufactures and other inputs
    from third countries not party to the agreement. Providing such
    opportunities to other countries which paid nothing for the privilege
    is simply bad trade policy. As such, any exceptions such as tariff
    preference levels that permit Asian manufacturers should not be
    included in any free trade agreement. With regard to free trade in
    textiles and apparel, the rules of origin should be no less rigorous
    than those incorporated in NAFTA.
        2. LA completely reciprocal and balanced tariff phase-out
    schedule--To permit one partner to a free trade agreement a longer
    phase-out of tariffs than the other is, again, bad trade policy, and
    NAFTA may serve as the model.
        3. LClear and strong provisions relating to customs enforcement
    measures intended to ensure full compliance with all terms and
    conditions of the agreement. These include the unequivocal right of the
    importing partner to audit and conduct inspections of exporters in the
    partner country as well as the inclusion of the ``kick-out'' clause
    described above.
    Vietnam Bilateral
        In its Commerce Department Textile Working Group Report issued last
    September, the U.S. government assured the American textile industry it
    would move quickly to conclude a bilateral textile agreement with
    Vietnam. However, because of intransigence on the part of the
    Vietnamese government, it is now March and an agreement is still not in
    place. According to trade figures released last week, imports from
    Vietnam totaled nearly one billion dollars in 2002, compared to just
    $50 million in 2001. During the same period of time, the U.S. textile
    industry shed 46,000 jobs--ten percent of its workforce--and closed at
    least 37 textile mills.
        The 2002 trade figures confirm a long-held concern on the part of
    the industry that imports from Vietnam would quickly mushroom once
    normal trading status was granted. AMTI notes that no non-WTO member
    country has ever been allowed to grow so dramatically before restraints
    have been imposed. Indeed, during the last major U.S. bilateral
    negotiation in 1999, Cambodia had comprehensive quotas imposed when
    trade was less than one-third of Vietnam's current level.
        According to the U.S. International Trade Commission, since
    October, monthly textile and apparel imports from Vietnam have
    leapfrogged over those of two major U.S. textile exports markets--
    Guatemala and Costa Rica--as well as other substantial suppliers such
    as Turkey, Sri Lanka, Cambodia, and Malaysia. Yet, we note that these
    countries have literally dozens of quotas in place while Vietnam
    remains quota-free. This raises an important equity issue--why is a
    country that is not a WTO member being given more favorable treatment
    by the U.S. than WTO members receive?
        As a point of contrast, during these same three months, the U.S.
    textile industry closed two knitting plants, one yarn plant and one
    weaving plant. In addition, two textile mills--Flynt Fabrics and
    Johnston Industries--filed for bankruptcy. It is clear to ATMI that
    Vietnam is playing a successful game of ``delay and build textile
    trade'' at the expense of U.S. producers and workers. ATMI strongly
    urges the government to impose unilateral restraints immediately on all
    products where such action is warranted. Whether or not these actions
    convince Vietnam to negotiate is irrelevant--these actions are
    justified and necessary.
    Other Bilateral Trade Issues
        There has been an increasing amount of agitation and pressure
    generated by our trading partners (and, most regrettably, within
    certain quarters in the United States) to weaken international
    disciplines and U.S. laws applicable to subsidies and dumping. Under no
    circumstances can this be allowed to happen. In fact, both
    international disciplines and U.S. laws must be expanded and
    strengthened in this regard. For example, injured domestic parties
    should be allowed to attack and receive relief from ``upstream''
    subsidies and dumping and to attack subsidies and dumping in third
    country markets, which displace U.S. exports. The following example of
    the latter demonstrates why this is necessary.
        One of the domestic textile industry's largest export markets (in
    fact, its second largest, after Mexico), is the Caribbean Basin Trade
    Partnership Act (CBTPA) countries. The U.S. industry exported $4.5
    billion worth of yarns, sewing thread, fabric and cut fabric pieces to
    this market last year, nearly all of which was used to assemble apparel
    for return to the United States.
        However, at the same time, several Asian countries exported
    unfairly traded (dumped, subsidized) yarns and fabrics to these same
    countries to be assembled into apparel for export to the United States.
    The CBTPA countries do not object to this trade because the goods enter
    foreign trade zones duty-free and are (almost) immediately re-exported
    without ever having entered their domestic market. Meanwhile, U.S.
    textile firms that lose valuable export sales as a result are powerless
    to do anything about it. This is a multi-billion dollar problem that
    needs to be addressed.
    Conclusion
        As this statement makes clear, the U.S. government's trade agenda
    is vitally important to the future well being of the domestic textile
    industry. ATMI welcomes the government's many actions in support of the
    U.S. industry during this particularly difficult period of time and
    looks forward to working with the Bush Administration and the Congress
    on the vitally important trade issues that remain to be addressed.
    These include the creation of an equitable Doha Round tariff and non-
    tariff barrier market access proposal, prompt use of the China textile
    safeguard, action against illegal Asian manipulators and the imposition
    of unilateral quotas on imports from Vietnam.

                                       Carmichael International Service
                                              Seattle, Washington 98104
    Committee on Ways and Means
    U.S. House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

        Re: Comments on the Trade Promotion Authority Act (TPA) of 2002
    (P.L. 107-210). Committee on Ways & Means Advisory of February 14,
    2003.

    Dear Sir or Madam:

        The above advisory invites comments on the implementation of the
    Trade Promotion Authority Act and we wish to take the opportunity to
    voice our concerns on the affects implementation will have on Duty
    Drawback in the United States on exports to countries with whom we
    enter into free trade agreements.
        Drawback is 200 year old trade policy whose stated purpose in 1789
    is the same as it is today--to promote U.S. exports and enhance the
    competitiveness of U.S. business simply be refunding duty paid on
    imports that are subsequently exported. Court cases dealing with
    drawback rarely fail to reiterate these purposes. The WTO's Agreement
    on Subsidies and Countervailing Measures has ruled that duty drawback
    is not an export subsidy. Yet with the implementation of NAFTA in 1993,
    drawback was severely restricted on exports to Canada and Mexico driven
    in part by misguided definitions of what the drawback law means by
    ``substitution drawback.'' The result is that drawback that is
    available on exports to our worst trading partners is eliminated
    completely in the case of Manufacturing Drawback and curtailed in the
    case of Unused Merchandise Drawback on exports to our best trading
    partners.
        Free trade acts that are implemented at punitive costs to U.S.
    exporters are not free, particularly when those costs are not present
    prior to free trade. We vigorously oppose the elimination or change of
    any of the present drawback law or regulations in any free trade
    agreement entered into with any country.
                Yours very truly,
                                                            Steve Orton
                                             Manager, Drawback Services

          Statement of the Carnegie Endowment for International Peace
    Trade, Equity, and Development Project
    February 2003

    Opportunities and Challenges to Advance Environmental Protection in the
    U.S.-Central American Free Trade Negotiations

        By John Audley
        Trade negotiations between the United States and Costa Rica,
    Guatemala, El Salvador, Honduras, and Nicaragua hold the potential to
    forge a new U.S.-Central American framework for trade that strengthens
    democracies; promotes respect for workers' rights; establishes sound,
    properly enforced environmental laws; and creates economic
    opportunities through trade for people living in developing nations.
    Accomplishing this challenging agenda will take bold leadership from
    all six countries.
        Central American governments have for some time recognized the
    importance of conserving natural resources and protecting their
    environment. Unfortunately, existing environmental infrastructures are
    inadequate to mitigate environmental damage stemming from urban, rural,
    and industrial activities. The Inter-American Development Bank has
    found that deteriorating investment in natural resources and
    environmental protection has put Central America's natural resources,
    as well as community health, at risk. Nearly 75 percent of Central
    America's population lives in conditions where vehicular congestion,
    industrial and vehicular emissions, depleted water sources, water
    pollution, and land and housing scarcities reduce productivity,
    increase violence, and diminish public health.i
    ---------------------------------------------------------------------------
        \i\ Inter-American Development Bank, Facing the Challenges of
    Sustainable Development: The IDB and the Environment: 1992-2002.
    (Washington, D.C.: Inter-American Development Bank, 2002).
    ---------------------------------------------------------------------------
        Recent reports by researchers from the United Nations Development
    Program and Oxfam also show that trade-led growth alone does not build
    healthy dynamic economies.ii In addition to trade, societies
    need infrastructure, education, and basic public health services before
    communities can begin to benefit from expanded economic activity. As
    the Oxfam report shows, without programs to promote access to better
    health care and education for children, trade liberalization in such
    key sectors as Central American coffee has resulted in plummeting
    commodity prices, thereby contributing to an increase in pressure on
    rural families to rely on their children's labor to earn a living wage.
    ---------------------------------------------------------------------------
        \ii\ See Kamal Malhotra, Making Trade Work for People. (London:
    Earthscan Publications Ltd, 2003); ``Rigged Rules and Double
    Standards'' (Oxford: Oxfam International, 2002).
    ---------------------------------------------------------------------------
        Relatively weak governing systems in most Central American nations
    raise doubts that increased trade and investment liberalization will
    lead to the necessary conditions for sustainable growth unless the
    United States makes achieving this objective a primary goal in
    negotiations for a U.S.-Central American Free Trade Agreement (CAFTA).
    Fortunately, the U.S. Congress and George W. Bush's Administration
    recognize the important relationship between U.S. trade policy,
    environmental protection, and more equitable growth. In The National
    Security Strategy of the United States of America, the Administration
    argues:
        A strong world economy enhances our national security by advancing
    prosperity and freedom in the rest of the world. Economic growth
    supported by free trade and free markets creates new jobs and higher
    incomes. It allows people to lift their lives out of poverty, spurs
    economic and legal reform, and the fight against corruption, and it
    reinforces the habits of liberty. . . . We will incorporate labor and
    environmental concerns into U.S. trade negotiations.iii
    ---------------------------------------------------------------------------
        \iii\ The National Security Strategy of the United States of
    America (Washington, D.C.: White House, 2002), pp. 17, 19.
    ---------------------------------------------------------------------------
        Congress makes the link between trade and environmental policy as
    well. U.S. Trade Promotion Authority (TPA) instructs U.S. negotiators
    to foster a healthy national economy, freer markets, and improvements
    in labor conditions and environmental protection.
        To fulfill both Congress's and the Administration's commitments to
    environmentally responsible trade agreements, the Office of the U.S.
    Trade Representative (USTR) must accomplish three goals in the CAFTA
    negotiations. First, it should integrate future technical assistance
    and capacity-building efforts into the existing framework of assistance
    offered to Central American nations to enhance their national,
    regional, and international levels of environmental protection. Second,
    in a manner consistent with TPA instructions, the U.S. negotiating
    positions should build upon existing trade and environment linkages to
    encourage its Central American trading partners to implement and
    strengthen environmental laws. Third, CAFTA should be negotiated and
    implemented in a manner that fosters good governance and reinforces
    democracy in Central America.

    BUILDING ON EXISTING ENVIRONMENTAL PROTECTION EFFORTS

        In passing Trade Promotion Authority, Congress emphasized for the
    first time the important role negotiations must play to ``strengthen
    the capacity of United States trading partners to protect the
    environment through the promotion of sustainable development.''
    iv This objective should be achieved through the existing
    framework of technical cooperation to avoid redundancy and to
    facilitate the coordination of technical assistance efforts already
    under way.
    ---------------------------------------------------------------------------
        \iv\ U.S. Trade Promotion Authority, Article 2102(b)(11)(D).
    ---------------------------------------------------------------------------
        The existing framework for environmental cooperation is based upon
    the work of the Comision Centroamericana de Ambiente y Desarrollo
    (CCAD), established by the Central American governments in 1988 to
    create and strengthen national organizations dedicated to environmental
    protection and development. Work orchestrated by CCAD is assisted by
    foreign governments and intergovernmental organizations, including the
    United States. Their combined contributions help provide technical
    expertise and capacity building in important areas such as climate
    change, endangered species protection, responsible forestry, and
    environmental protection.v
    ---------------------------------------------------------------------------
        \v\ Since 1995, under the auspices of the U.S. Agency for
    International Development's (USAID's) Ambiental Regional para
    Centroamerica (PROARCA) project, U.S. federal agencies have assisted
    Central American nations to increase the effectiveness of regional
    stewardship of the environment and key natural resources in target
    areas. In particular, U.S. support has emphasized coastal water
    protection and maintaining the biodiversity of the region's key forest
    systems. PROARCA's contribution to the enhancement of Central American
    environmental protection efforts is consistent with the goals of the
    Central American-United States of America Joint Accord (CONCAUSA),
    which was signed on the margins of the 1994 Miami Summit of the
    Americas and renewed in 2001. This accord made the United States the
    first extraregional partner in the already existing Central American
    Alliance for Sustainable Development (ALIDES). For detailed information
    on targeted CCAD areas and sources of support, see http://
    ccad.sgsica.org. See
    http://www.ard-biofor.com/proarca.html for additional information
    regarding the PROARCA project. See the Department of State fact sheet
    at http://www.state.gov/r/pa/prs/ps/2001/3325.htm.
    ---------------------------------------------------------------------------
        To ensure that the framework for existing technical support is
    incorporated into negotiations, federal agencies, Congress, and
    interested citizens should be made fully aware of the technical
    assistance and capacity-building work already under way in Central
    America. In TPA, Congress created a special oversight group to monitor
    the trade negotiations on a day-to-day basis; this Congressional
    Oversight Group should seek summary reports from federal agencies
    involved in ongoing technical support projects.vi
    ---------------------------------------------------------------------------
        \vi\ The U.S. Agency for International Development is responsible
    for the Administration of Central American technical assistance under
    PROARCA. The U.S. Environmental Protection Agency has implemented many
    PROARCA technical assistance projects, e.g., to develop integrated
    solid waste management and wastewater treatment infrastructure, to
    reduce the inventory of obsolete pesticides stockpiled throughout the
    region, and to improve food quality for fresh produce exported from
    Central America.
    ---------------------------------------------------------------------------
        Central American governments should be encouraged to consult with
    CCAD, PROARCA, and CONCAUSA as they develop their hemispheric
    cooperation programs. On the basis of a review of the national action
    plans for trade capacity building recently released by the Central
    American governments, such interaction has not yet occurred; as a
    result, these draft national action plans fail to fully incorporate
    environmental infrastructure and capacity-building needs.vii
    Costa Rica is an exception; in its draft plan of action, it emphasized
    the need to develop and strengthen solid waste disposal, wastewater
    treatment, and hazardous waste management throughout the country.
    ---------------------------------------------------------------------------
        \vii\ National action plans (as of February 2003) for El Salvador,
    Guatemala, Honduras, and Nicaragua can be viewed at www.USTR.gov.
    ---------------------------------------------------------------------------
        Given the large loads and small staffs of these negotiating teams,
    this is not surprising. U.S. embassies should be instructed by the
    Department of State to contact Central American environment and
    development agencies and promote interaction between Central American
    trade policy makers and these programs. Along with the long-term
    benefits of better coordination between international trade and
    domestic policy, State Department Foreign Service offices can also
    explain that including environment and development concerns in their
    plans of action will actually help U.S. negotiators achieve the broader
    goals for trade liberalization outlined by Congress in TPA.
        Finally, relationships between Central American officials and the
    staffs of relevant U.S. federal technical support agencies (e.g.,
    USAID, the Environmental Protection Agency, and the Department of
    Agriculture) are critical to the long-term success of technical
    assistance projects. Such direct working relationships between donor
    and client help tailor U.S. assistance to meet the needs of countries
    receiving assistance. Because long-term technical assistance and
    capacity building will not be the USTR's responsibility, to help foster
    appropriate intergovernmental relationships, the USTR should assign
    officials from such agencies as USAID and the Department of State to
    negotiate technical assistance agreements. The U.S. Departments of
    State, Commerce, and the Treasury historically have taken the lead in
    negotiating areas of trade agreements in which they have particular
    expertise. Reallocating USTR officials to assist negotiations in other
    areas would also help to lessen the burden shouldered by USTR staff to
    engage in a growing number of trade negotiations.

    TRADE-RELATED INCENTIVES FOR ENVIRONMENTAL PROTECTION

        Under work orchestrated nationally and in such regional efforts as
    CONCAUSA, Central American governments have taken important steps
    toward establishing an effective environmental protection regime. That
    said, many important challenges remain. In addition to supporting
    ongoing capacity-building efforts, the United States should negotiate a
    free trade agreement that creates direct, trade-related incentives for
    environmental protection.

    Promoting Green Product Exports

        There is a growing demand for goods produced in an environmentally
    sustainable fashion. The European Union estimates that its
    environmental ``industry'' generates 54 billion euro a year, and
    employs more than 2 million people, or 1.3 percent of its total paid
    labor force. Roughly 1.5 million people are employed in pollution
    management activities, and another 650,000 in resource management.
    Investors in industrial countries have also begun to tailor their own
    investments to promote environmentally sustainable production. The
    value of managed investment funds that now use one or more social-
    screening criteria--of which environmental criteria are among the most
    prominent--increased from $1.49 trillion in 1999 to more than $2
    trillion in 2001. Today, nearly one in every eight dollars under
    professional management in the United States is invested in socially
    responsible firms.
        In its Doha Declaration, the World Trade Organization's (WTO)
    reflected this shift in interest in environmental goods by instructing
    its Members to reduce or eliminate tariff and nontariff barriers to
    environmental goods and services.viii Congress supports this
    initiative in its trade instructions to the USTR.ix
    Unfortunately, the current focus in WTO negotiations is on high-
    technology environmental goods, such as pollution scrubbers and
    wastewater treatment equipment.
    ---------------------------------------------------------------------------
        \viii\ World Trade Organization, Fourth Session of the World Trade
    Organization Ministerial Declaration, adopted in Doha, Qatar, on
    November 14, 2001.
        \ix\ U.S. Trade Promotion Authority, Article 2102(b)(11)(F).
    ---------------------------------------------------------------------------
        Although the high-technology environmental goods sector is
    important for promoting sustainability, these products are produced and
    traded by industrial countries, so there is little incentive for such
    developing countries as Honduras, Guatemala, El Salvador, or Nicaragua
    to support the negotiations. Conversely, along with Costa Rica, these
    countries enjoy a competitive advantage in environmentally sensitive
    agricultural products. The United States and Central American countries
    must take the innovative step of proposing favorable trade terms for
    Central American agricultural products that are produced in sustainable
    ways.
        Along with technical assistance programs to help Central Americans
    resolve nontariff issues related to food safety or technical barriers,
    facilitating trade in ``green'' agricultural products by eliminating
    all tariffs and tariff-rate quotas on these products would help the
    U.S. government achieve a number of objectives. Industrial countries
    resist expanding the definition of an environmental good, fearing that
    the temptation is too great to exploit this language to protect
    domestic industries. Both industrial and developing countries also fear
    the use of product labels necessary to distinguish green products.
        Though conscious of these constraints, negotiating a solution to
    both the problem of how to define a green good and the use of product
    labels among a smaller number of countries first would enable the
    United States and its neighbors to propose unified solutions in
    multilateral negotiations. Preferential or accelerated trade
    liberalization in organic products also demonstrates to the public that
    trade rules can encourage trade in products that make sense
    economically and socially. Finally, due to its more labor-intensive
    nature, sustainable agriculture will help keep farmers working, and
    thereby promote healthy rural communities. And given the growing number
    of consumers willing to pay a premium for organic products, trade
    liberalization in green agricultural products would pose minimum
    competition for U.S. farmers.

    Making Binding Commitments to Protect the Environment

        Congress also instructed U.S. negotiators to ensure that the
    country's trading partners do not fail to effectively enforce their
    labor and environmental laws to gain a competitive advantage.
    Unfortunately, to date this approach has achieved little in the
    environmental sphere. Parties have never implemented Part V of the
    North American Agreement on Environmental Cooperation (NAAEC), making
    it virtually impossible for one party to file a complaint against
    another. U.S. trade agreements with Jordan, Chile, and Singapore mark
    an important shift in U.S. trade policy because they move the
    commitment to enforce environmental laws into the body of the trade
    agreement. Yet even this kind of ``enforceable'' environmental language
    is unlikely to be applied effectively without public involvement in its
    implementation.
        To strengthen the linkages between trade commitments and
    environmental policy goals, the United States should negotiate several
    additional provisions for CAFTA. First, besides insisting that Central
    American governments enforce their national environmental laws, the
    United States and Central American countries should agree to two
    things. First, they should agree that all trade measures found in
    multilateral environmental agreements are consistent with international
    trade obligations, and therefore immune from WTO challenges from CAFTA
    parties. Second, the United States and Central American nations should
    make a commitment to implement the multilateral environmental
    agreements (MEAs) containing trade measures to which they are a
    signatory.
        Although the World Trade Organization has not yet finalized a list
    of MEAs containing trade measures, the United Nations Environment
    Program (UNEP) and the International Institute for Sustainable
    Development (IISD) identify only about twenty MEAs that contain trade
    provisions, of which even fewer are significant for the environment-
    trade interface.x The United States argues that there are no
    inconsistencies between WTO rules and MEAs; one way to support this
    position is to encourage the CAFTA parties to work with UNEP to
    determine and implement all trade measures found in MEAs to which they
    are a party.xi
    ---------------------------------------------------------------------------
        \x\ The United Nations Environment Program (UNEP) Division of
    Technology, Industry and Economics, Economics and Trade Unit, and the
    International Institute for Sustainable Development (IISD), Environment
    and Trade: A Handbook (Winnipeg: ISSD and UNEP, 2000).
        \xi\ MEAs relevant to trade regimes include the Convention on
    International Trade in Endangered Species of Wild Fauna and Flora
    (CITES); the Convention on Biological Diversity; the Montreal Protocol;
    the Basel Convention on the Control of Transboundary Movement of
    Hazardous Wastes and their Disposal; the Framework Convention on
    Climate Change; the Convention on Persistant Organic Pollutants; the
    Rotterdam PIC Convention (not yet in force); and the Cartagena Protocol
    on Biosafety (not yet in force).
    ---------------------------------------------------------------------------
        U.S. technical assistance also should be directed to assisting
    Central American governments to fully implement their MEA obligations,
    whether or not the United States has signed or ratified the same
    treaty. For example, the Montreal Protocol, which all CAFTA parties
    have ratified, has successfully controlled trade in ozone-depleting
    substances and trade in products containing these substances; to help
    accomplish this goal, it established a fund to assist developing
    countries in their transition away from controlled substances. The
    United States should likewise assist its Central American trading
    partners to build the capacity necessary to comply with their MEA
    obligations, even if--as in the case of the Basel Convention on the
    Control of Transboundary Movement of Hazardous Wastes and their
    Disposal--the United States itself has not yet ratified a particular
    agreement.
        Second, the United States and Central American countries should
    make a commitment to take the necessary legislative, regulatory, and
    other measures to collect and publicly disseminate environmental
    information. For the Central American countries, this provision should
    include taking steps to establish progressively--with U.S. technical
    assistance--a coherent, nationwide pollutant release and transfer
    register, which is similar to the U.S. Environmental Protection
    Agency's Toxic Release Inventory.
        International demand is growing for pollution ``right to know''
    legislation similar to that applied in the United States. Other
    governments are responding to public demand as well. The government of
    Mexico recently modified its General Law of Ecological Balance and
    Environmental Protection to require states, the Federal District, and
    municipalities to keep a release and transfer register for air, water,
    soil and subsoil pollutants, materials, and wastes under their
    jurisdictions, as well as those substances determined by the
    corresponding authority. Changes in Mexican law are directly the result
    of technical assistance provided by the North American Agreement on
    Environmental Cooperation, to which the U.S. is a party. Other examples
    of the move to public disclosure can be found in the Aarhus Convention,
    which to date has been signed by 40 European governments.xii
    Accessible and transparent information will provide moral suasion
    incentives for CAFTA trading partners and investors to uphold national
    environmental laws, as well as permit stronger analyses of trade-
    related environmental impacts.
    ---------------------------------------------------------------------------
        \xii\ Convention on Access to Information, Public Participation in
    Decision Making, and Access to Justice in Environmental Matters, signed
    June 25, 1998, at Aarhus, Denmark. Though the U.S. government has
    raised concerns about the compliance regime of the Aarhus Convention,
    the spirit of the convention is in line with U.S. domestic policy and
    international priorities, and as such it should be recognized as a
    basis for negotiations.
    ---------------------------------------------------------------------------
        Third, CAFTA parties should negotiate language encouraging private
    industry to follow voluntary guidelines for environmental management
    and reporting, including Responsible Care, the International Standards
    Organization's ISO-14000, and the disclosure guidelines found in the
    Organization for Economic Cooperation and Development's Guidelines for
    Multinational Corporations. As important as negotiated text is, perhaps
    the most effective way for private firms to influence environmental
    protection is to demonstrate that businesses can and will be
    responsible Members of both international and local communities.
        In this regard, many U.S. and Canadian firms have records to be
    proud of, because they are leaders in the use of green technology to
    lowers costs and increase productivity while improving the environment.
    These companies also have adopted responsible policies for releasing
    public information regarding chemical use, emergency response programs,
    and other environmental management practices. With proper encouragement
    from governments, disclosing information regarding environmental
    practices should be a small step for business to take--with tremendous
    potential for positive gain.
        Finally, the policy steps recommended here must be supported by the
    creation of an objective reporting mechanism to ensure that new laws
    are effective and enforced. The United States and its Central American
    trading partners can break new ground in this area by instructing UNEP
    to conduct independent reviews of U.S. and Central American trade-
    related environmental laws and their implementation. In the short term,
    information of this kind would be useful to focus U.S. technical
    assistance and capacity building in preparation for CAFTA's
    implementation. More generally, environmental protection performance
    reports would provide information useful for the Bush Administration's
    efforts to promote good governance, and perhaps help in determining
    whether a particular Central American country is eligible for
    additional U.S. development assistance.

    GOVERNANCE AND TRADE

        The Bush Administration rightly emphasizes the link between good
    governance and healthy societies. In his speech announcing the
    Millenium Challenge Account, the president said:

            L  Countries that live by these three broad standards--ruling
            justly, investing in their people, and encouraging economic
            freedom--will receive more aid from America. And, more
            importantly, over time, they will really no longer need it,
            because nations with sound laws and policies will attract more
            foreign investment. They will earn more trade revenues. And
            they will find that all these sources of capital will be
            invested more effectively and productively to create more jobs
            for their people.xiii
    ---------------------------------------------------------------------------
        \xiii\ ``President Proposes $5 Billion Plan to Help Developing
    Nations,'' remarks by the U.S. president on global development, Inter-
    American Development Bank, Washington, D.C., March 14, 2002.

        Trade agreements can contribute to achieving the goal of good
    governance if they involve the public in their negotiation and
    administration. The United States should negotiate CAFTA to include
    three good governance provisions: dispute settlement proceedings,
    environmental reviews of trade agreements, and participation and
    ---------------------------------------------------------------------------
    transparency measures.

    Dispute Settlement Proceedings

        The record of international trade dispute settlements underscores
    the impact that these decisions can have on domestic policies. In some
    instances, public health or food safety regulations developed through
    public notice and comment are being challenged as inconsistent with
    trade disciplines. Just as in cases where the government considers
    amending a U.S. law in response to litigation, the public has standing
    in such cases. Citizens should be able to
        a) Loffer their opinion on the case through amicus curiae
    submissions;
        b) Lhave access to all nonproprietary documents related to the
    dispute;
        c) Lobserve the presentations before the dispute settlement panel;
        d) Lhave immediate access to the findings; and
        e) Lbe eligible for an appeal process that enables governments to
    correct for improperly decided cases.
        These recommendations are consistent with congressional
    instructions to promote openness at the WTO and other international
    institutions, and they currently make up the USTR's formal position
    offered in WTO Geneva discussions.xiv
    ---------------------------------------------------------------------------
        \xiv\ U.S. Trade Promotion Authority, Article (2102)(b)(5);
    ``Contribution of the United States to the Improvement of the Dispute
    Settlement Understanding of the WTO Related to Transparency''
    (Washington, DC: Office of the U.S. Trade Representative, August 9,
    2002; available at: http://www.USTR.gov/enforcement/2002-08-09-
    transparency.pdf).

    ---------------------------------------------------------------------------
    Environmental Reviews of Trade Agreements

        The United States should actively encourage its trading partners to
    conduct environmental assessments of trade liberalization. A 1999
    report commissioned by the environmental ministry in Brazil underscores
    the level of interest among Latin American governments in this kind of
    analysis.xv Efforts by the Organization of American States
    and such private organizations as the World Wildlife Fund and World
    Resources Institute have shown that conducting environmental
    assessments builds long-term capacity to enact and enforce national
    environmental laws.
    ---------------------------------------------------------------------------
        \xv\ Luciano Togiero de Almeida, ed., Trade and Environment: A
    Positive Agenda for Sustainable Development, Preliminary Document for
    the XIII Meeting with the Latin American and Caribbean Environment
    Ministers (Brasilia: Brazilian Ministry of Environment, Secretariat of
    Policies for Sustainable Development, 2001).

    ---------------------------------------------------------------------------
    Participation and Transparency

        In her work on behalf of the Inter-American Development Bank,
    recognized trade scholar Sylvia Ostry has shown that few countries in
    the Western Hemisphere have a trade policy-making process that
    adequately and fairly consults with ministries, parliaments, or
    affected constituencies.xvi Simultaneously, citizens' groups
    around the world are asking their governments to develop and implement
    trade policy in a more open and transparent fashion.
    ---------------------------------------------------------------------------
        \xvi\ In a project funded by the Inter-American Development Bank,
    Ostry researched and wrote reports on Argentina, Brazil, Columbia,
    Mexico, Costa Rica, and Uruguay. Interested parties may request drafts
    of these reports by contacting John Audley.
    ---------------------------------------------------------------------------
        The United States has an opportunity to increase good governance by
    incorporating certain transparency and public participation provisions
    into the CAFTA agreement. In particular, the United States should
    insist that CAFTA
        a) Grants citizens a right of petition: The United States has been
    severely criticized for using trade agreements to grant industries the
    right to seek compensation for actions resulting in property
    expropriation by parties to a trade agreement. Although I do not
    believe that this approach to ensuring property rights protection is
    unnecessary, citizens should be given the same opportunity to petition
    for their rights. Such a right of action should lead either to a formal
    case brought against a government--for example, for failure to enforce
    its own national and international commitments to protect the
    environment--or to an independent study similar to that provided in
    NAAEC Article 14 for enforcing laws affecting trade policy.
        b) Includes a public advisory body: One of the most effective
    models for including citizens in the administration of a trade and
    environment agreement is the Joint Public Advisory Committee (JPAC),
    part of the governing council of the North American Commission for
    Environmental Cooperation. JPAC has played a constructive role in the
    side agreement's implementation, serving to guide both government
    officials and interested citizens toward responsible balances between
    trade and environmental policy priorities. The administrative body to
    the CAFTA agreement should include a private advisory body similar to
    JPAC, with two individuals from each CAFTA country selected to serve on
    its board.
        c) Provides for data collection and dissemination: Data on the
    implications of economic integration for the environment and health
    should be gathered and widely disseminated. As was discussed above,
    UNEP is a good candidate to aggregate, evaluate, and distribute this
    kind of information, provided it receives adequate support to do so
    from the CAFTA parties. The cooperative work plan and information
    gathering projects under way at the North American Commission for
    Environmental Cooperation also provide a good model to follow.

    PROGRESS TOWARD RESPONSIBLE TRADE

        Designing trade regimes that promote environmental protection,
    strengthen the rule of law, and encourage good governance is not an
    easy challenge to meet. That said, the CAFTA negotiations present a
    timely opportunity to accomplish these objectives and to help put the
    U.S. and Central American governments on a path toward ecologically
    sustainable trade and investment liberalization.
        The proposals offered here present negotiators, interested
    citizens, and national and subnational legislators with a roadmap to
    navigate these challenges and deliver a trade agreement that will win
    the support of people throughout Central America and the United States.
    The repercussions of these negotiations for the six countries is great;
    the example they can set for other negotiations may be even greater.
        U.S. trade representative Robert Zoellick has demonstrated that he
    understands the importance of factoring environmental issues into trade
    agreements. Looking forward, the United States must now negotiate and
    implement the proposed CAFTA in a manner that integrates future
    technical assistance and capacity-building efforts into the existing
    framework of environmental cooperation, creates trade-related
    incentives for sound environmental protection, and fosters good
    governance.

        John Audley is a senior associate at the Carnegie Endowment for
         International Peace, where he directs the Trade, Equity, and
    Development Project. Before joining the Endowment in April 2001, he was
       the trade policy coordinator at the U.S. Environmental Protection
      Agency, where he was responsible for developing and presenting EPA
                        positions on U.S. trade policy.

    Trade, Equity, and Development Project
    February 2003

     LCentral America and the U.S. Face Challenge--and Chance for Historic
                        Breakthrough--on Workers' Rights

    By Sandra Polaski

        The negotiations between the United States and five Central
    American countries for a free trade agreement present an important,
    even unique, opportunity to build and buttress the rule of law, human
    rights, and democracy in Central America, as well as to invigorate the
    region economically. In fact, the deep integration that a free trade
    area would foster between the United States and Costa Rica, Guatemala,
    El Salvador, Honduras, and Nicaragua requires a strengthening of basic
    law and institutions in a region with a troubled history and a
    troubling present in terms of human rights and the rule of law.\1\ Few
    informed observers--from U.S. trade representative Robert Zoellick to
    the State Department to many in Central America--doubt that serious
    deficiencies exist in the region. These deficiencies must be addressed
    if a trade agreement is to produce positive results.
    ---------------------------------------------------------------------------
        \1\ See U.S. Department of State, 2001 Country Reports on Human
    Rights Practices, http://www.state.gov/g/drl/rls/hrrpt/2001/; reports
    for previous years are available at http://www.state.gov/www/global/
    human--rights/
    hrp--reports--mainhp.html. These authoritative
    reports describe serious problems with human rights abuses and
    inefficient or corrupt judiciaries in four of the five countries and
    continuing problems of somewhat lesser severity in Costa Rica.
    ---------------------------------------------------------------------------
        Nowhere are the deficiencies of present-day Central America--and
    the opportunities for progress through a well-constructed free trade
    agreement--more apparent than in the area of workers' rights, labor
    law, and labor institutions.\2\ Central America has been the scene of
    continuing abuses of workers' rights. These abuses include the ongoing
    suppression of workers' right to organize in export-processing zones,
    physical threats, beatings, kidnappings, and even assassinations of
    trade union leaders. Child labor is a serious problem, including in
    dangerous occupations. Employment discrimination against women and
    indigenous workers is rife. Given that a free trade agreement is meant
    to encourage greater investment in the region and an expansion of
    production for the U.S. market, these ongoing violations must be
    addressed at the outset. Otherwise, an agreement would further entrench
    and expand current systemic violations of workers' rights.
    ---------------------------------------------------------------------------
        \2\ See U.S. Department of State, 2000 Country Reports on Human
    Rights Practices and 2001 Country Reports on Human Rights
    Practices,section 6, ``Worker Rights.''
    ---------------------------------------------------------------------------
        A free trade agreement offers the opportunity to create political
    space in Central America for needed legislative reforms that have
    eluded government efforts until now. The terms of a trade agreement
    also can strengthen government enforcement of laws and provide
    incentives for the private sector to voluntarily comply with labor
    legislation.

    BACKGROUND

        Ongoing labor problems have been such a concern to the United
    States that Congress has fashioned policy instruments to deal with
    these abuses through current unilateral trade preference programs. The
    Generalized System of Preferences (GSP), the Caribbean Basin Economic
    Recovery Act (CBERA), and the Caribbean Basin Trade Partnership Act
    (CBTPA) all extend market access benefits unilaterally to the Central
    American countries on the condition that they respect workers' rights.
    In fact, 74 percent of Central American products entered the United
    States duty free in 2002 under these unilateral preference programs.
    The programs require that recipient countries accord the following
    internationally recognized workers' rights to their citizens: freedom
    of association; the right to collective bargaining; protections against
    child labor; freedom from forced labor; and acceptable conditions of
    work with respect to minimum wages, hours of work, and occupational
    safety and health. If countries fail to respect these rights, they run
    the risk of losing the trade preferences for some or all of their
    products.
        These provisions have been invoked frequently with respect to these
    five Central American countries, both by the U.S. government and by
    private human rights and labor groups. At least eighteen petitions
    alleging violation of these rights in Central America have been filed
    by private groups in recent years. Several petitions are currently
    pending. In eight separate instances, the U.S. government itself has
    initiated reviews of labor conditions in Central America or decided to
    continue reviews that originally were undertaken in response to
    petitions by the public. In each case, the reviews have been based on
    U.S. concerns over continuing rights violations in these countries.\3\
    ---------------------------------------------------------------------------
        \3\ Sources include the ``Public Worker Rights Summaries'' prepared
    by the U.S. government interagency GSP subcommittee and issued by the
    U.S. trade representative (USTR) from 1988 to 1995 and USTR press
    releases.
    ---------------------------------------------------------------------------
        The GSP and other instruments have not solved the basic problem of
    the lack of rights and rule of law for workers in the region. But they
    have at least reversed the most egregious violations of rights and
    threats to lives and arguably have prevented many more such abuses by
    the very fact of their existence.
        A free trade agreement with Central America would eliminate these
    existing policy instruments because it would replace the unilateral
    preference programs. At the same time, market access to the United
    States would be expanded. This would leave existing problems to fester
    and invite further abuse.
        There is little chance that a free trade agreement will be
    negotiated that contains no labor provisions. The Trade Act of 2002
    spells out chief negotiating objectives on labor, including several
    provisions similar to those contained in the U.S.-Jordan Free Trade
    Agreement. But unlike Jordan, which has reasonably good labor laws,
    relatively effective enforcement, and the overall rule of law, Central
    American countries have glaring weaknesses in their laws, inadequate
    enforcement, and judicial systems that fall short of any reasonable
    standard for the rule of law.

    THE CHALLENGE

        Therefore, the parties must fashion labor provisions in the U.S.-
    Central American free trade agreement that accomplish four
    indispensable goals. First, the agreement must ensure that trade
    benefits continue to be conditioned on adequate respect for workers'
    rights, to avoid backsliding and to maintain the accountability of
    Central American governments that currently exists under the GSP and
    CBTPA. Second, the agreement must address the problem that existing
    laws are inadequate when measured against agreed-on international
    standards and ensure that laws are upgraded to such international
    norms. Third, the agreement must include provisions to strengthen labor
    law enforcement and to create the true rule of law with regard to the
    rights of workers. Fourth, the agreement must devise a way to verify
    that all of the above steps are being taken and maintained.
        The trade negotiations with the Central American countries will be
    the most challenging that the United States has faced with regard to
    labor rights. The four critical goals listed above may seem difficult
    to achieve in these negotiations. However, this paper presents a
    proposal for the labor provisions of the agreement that would enable
    the parties to meet each goal. This proposal builds on lessons that
    have been learned through other trade agreements that the United States
    has negotiated in recent years. Both the United States and its
    developing-country partners have gained experience through the
    implementation of those agreements. Although accomplishing the four
    goals will be a challenge, it is fortunate that there has been a wealth
    of experimentation that now can guide the U.S.-Central American
    negotiations.

    PROPOSAL FOR A SOLUTION

        This section offers an overall framework for an agreement that can
    achieve the four crucial labor goals outlined above. It also offers
    suggestions as to what labor obligations or commitments should be
    required of the parties; how the dispute settlement mechanism should
    work; and other proposals regarding transparency, oversight and the
    role of the public.

    Framework

        The framework for an agreement on labor rights must begin with the
    establishment of a transitional period before full free trade would be
    phased in. Of course, such a phase-in of tariff reductions and other
    liberalizations is the norm under free trade agreements and will
    undoubtedly be a part of the structure of this proposed agreement. But
    a U.S.-Central American Free Trade Agreement (CAFTA) must include a
    specific provision that the benefits of the agreement can be
    accelerated--or delayed--for each Central American country and each
    sector within those countries on the basis of whether the country and
    sector have met the agreement's obligations with respect to workers'
    rights.
        Four factors argue for establishing a transitional period that can
    be accelerated or delayed depending on the performance of each country
    and each sector in promoting labor rights. First, this approach will
    replace the conditionality of current unilateral preference programs
    such as the GSP with an equally potent incentive for countries and
    firms to comply with the labor terms of the agreement. Thus the United
    States will not sacrifice an existing lever for progress on labor
    rights without substituting an equally effective instrument.
        Second, having the transitional period will create healthy
    competition between countries to actually carry out the promised
    reforms of labor legislation, enforcement, and the rule of law, because
    each country can accelerate its enjoyment of valuable trade advantages
    by doing so. Third, the approach will align the incentives of the
    private sector with those of the public sector, because neither the
    government nor firms can gain trade privileges without the cooperation
    and support of the other. Fourth, the failure of firms in a particular
    sector to comply with their obligations will not halt or delay the
    benefits for other sectors that have met their obligations. To
    illustrate, if agribusiness firms refused to abide by labor laws but
    apparel firms demonstrated compliance, the apparel sector would receive
    accelerated benefits and not be held back by any intransigent sector.
        How long should such a transitional period run? As a rule of thumb,
    the fifteen-year phase-in of the North American Free Trade Agreement
    (NAFTA) or the twelve-year phase-in of the recently negotiated U.S.-
    Chile Free Trade Agreement are probably useful guides. Countries and
    sectors that chose to fulfill the labor terms of the agreement could
    enjoy benefits promptly, perhaps as soon as one year after the
    agreement enters into force, thus providing a very substantial
    incentive for compliance. Conversely, countries and sectors that
    refused to shoulder their obligations would have to face the prospect
    of a continuing denial of benefits.
        Such a system will require credible, neutral oversight to determine
    the actual degree of compliance by different sectors in each country.
    Although this might sound like a very large undertaking, a similar
    system has already been created with remarkable success and efficiency
    under another U.S. trade agreement: the U.S.-Cambodia Textile
    Agreement. This agreement established that Cambodia can receive the
    incentive of additional apparel quota if it meets its obligations under
    the agreement to protect the rights of workers and enforce its labor
    laws in the textile and apparel sector. The agreement obviously
    required oversight, as would CAFTA.
        In the case of the U.S.-Cambodian agreement, the parties agreed to
    ask the International Labor Organization (ILO) to monitor the factories
    in the sector and report its findings to the parties as a basis for
    decisions on any quota increase. The ILO agreed to undertake a
    monitoring program and established a credible, efficient, and
    transparent system. ILO monitors (most hired locally) inspect
    factories, report the results to factory managers and to the two
    governments, and allow a reasonable period for remediation. After the
    remediation period, a second inspection is conducted, and a report is
    issued as to whether the factory is in compliance.
        This system has provided the information needed by the parties to
    the U.S.-Cambodian trade agreement to make decisions on incentives. The
    parties also take other factors into account, such as progress on labor
    legislation and the rule of law with respect to labor rights. The
    monitoring program is funded jointly by the U.S. government, the
    Cambodian government, and the Cambodian textile and apparel sector; the
    United States provides about 70 percent of the funding, and the other
    parties provide about 15 percent each. A tripartite committee--
    consisting of representatives of the Cambodian government, textile and
    apparel firms, and trade unions representing the workers--oversees the
    program. The striking improvements in working conditions and compliance
    with law that have been achieved in this sector suggest that this has
    been one of the most successful and cost-effective programs to promote
    worker rights abroad that the U.S. Government has ever funded. The
    agreement and the monitoring program were deemed so successful by both
    governments that when the initial agreement expired it 2001 it was
    renewed for three more years--with an expanded potential quota bonus
    for further progress on labor rights.
        This U.S.-Cambodian model would be well suited for adaptation in
    CAFTA. All the governments involved are Members of the ILO. The ILO
    could draw upon the signal experience it gained in Cambodia to
    construct a similarly well-run program in Central America. U.S. firms
    that import products from Cambodia have been impressed favorably by the
    ILO program, the improvements it has induced in the factories from
    which they buy, and the protection it provides for their own
    reputations. Because many of the same firms import from Central
    America, their familiarity with the approach would help ease the
    introduction of such a program in that region.

    Obligations

        What labor obligations should be included in CAFTA? The United
    States has developed two relevant models for labor obligations in the
    context of trade arrangements. Both should be applied in this proposed
    agreement.
        The first model operates in the GSP and CBTPA programs, which
    require that beneficiary countries afford protection for
    internationally recognized workers' rights, as defined above. This
    model encompasses the enforcement of existing labor laws and, where the
    labor laws are deficient compared with international norms, it has also
    been used to require improvements in labor legislation.
        Typically, the United States has looked to the ILO experts to
    determine whether a country's labor laws meet international norms. ILO
    experts have judged that all five of the Central American countries
    involved in these negotiations have deficiencies in their basic labor
    laws.
        Therefore, it is essential that the five countries be obligated to
    reform their labor laws to correct these shortcomings. This should be a
    threshold obligation of the agreement. In requiring legal reform, the
    United States would follow a pattern it has already established in
    negotiations over intellectual property rights, where it has insisted
    on legal improvements to further protect those rights.\4\ Similarly,
    the United States must insist on improved protections for labor rights,
    given the inadequacy of current laws.
    ---------------------------------------------------------------------------
        \4\ In his October 1, 2002, letter of notification to Congress of
    the Administration's intent to enter into free trade negotiations with
    Central America, USTR Zoellick wrote that the negotiations would be
    used to address ``inadequate protection of intellectual property
    rights'' in those countries' laws. Specifically, he wrote that the
    United States would seek levels of patent protection in line with U.S.
    practices and provisions for strengthened legal enforcement, including
    through criminal penalties and compensation of rights holders.
    ---------------------------------------------------------------------------
        The second model pioneered by the United States requires that its
    trading partners effectively enforce their labor laws. This model was
    employed in the labor side agreement to NAFTA, and is one aspect of the
    approach in the U.S.-Jordan free trade agreement. Once Central American
    labor laws are amended to meet international norms, there must be an
    ongoing obligation to enforce them, as there is with other trading
    partners.

    Dispute Settlement

        The Trade Act of 2002 instructs U.S. trade negotiators to subject
    labor provisions of trade agreements to the same dispute settlement
    procedures as other disputes arising under the agreements, with
    equivalent remedies. CAFTA should follow that guidance. Such dispute
    settlement procedures would take effect once a country and a sector had
    been determined to be in compliance with the terms of the agreement and
    had been extended full free trade benefits on the basis of the criteria
    and monitoring procedures discussed above.
        Dispute settlement panels should comprise experts on international
    labor norms and comparative domestic labor laws. Time frames for
    dispute settlement should be identical to those for commercial
    disputes. Possible penalties for noncompliance with panel rulings
    should cover the same range as penalties for noncompliance with rulings
    in commercial disputes, with the specific provisions tailored to
    provide meaningful remedies for nonenforcement of labor laws.

    Transparency, Oversight, and Public Petitions

        CAFTA will replace the current U.S. system of unilateral trade
    preferences for the Central American countries. That system includes
    the ability of the public and affected workers to raise concerns
    directly to the U.S. government when labor rights are violated. This
    mechanism has been used repeatedly under the GSP and CBTPA programs, as
    discussed above, leading to the resolution of some egregious problems
    and arguably forestalling worse or more frequent abuses. Therefore, a
    new free trade agreement between these parties must replicate that
    important public oversight mechanism.
        The specific mechanism could vary, but elements of a model can be
    found in the North American Agreement on Labor Cooperation (NAALC)\5\
    and the existing GSP system. At a minimum, any public petition
    mechanism should provide a specific, standing venue for the submission
    of petitions or requests for review. Any individual or organization in
    any of the countries that is a party to the agreement should be able to
    file a petition or request in any of the other countries, as is the
    case under NAALC. Upon receipt of such a filing, the United States and
    other governments should guarantee a thorough, unbiased review of the
    allegations in the petition within a defined period of time, certainly
    no more than six months. The mechanism should guarantee the right, at a
    minimum, to a public hearing on the allegations.
    ---------------------------------------------------------------------------
        \5\ NAALC is the labor side agreement to NAFTA.
    ---------------------------------------------------------------------------
        Where the claims of a public submission are deemed to have merit,
    the issues raised should be referred for intergovernmental
    consultations to attempt to remedy the problems, as has been the
    practice under NAALC. If these consultations fail to produce a
    meaningful remedy for the problems within a defined time frame, the
    problem should be referred to a dispute settlement panel under the
    terms outlined above in the discussion of dispute settlement.
        This procedure will ensure that those who have the best information
    about violations of labor rights--the workers themselves--have
    meaningful input into government oversight processes. This provides
    both healthy transparency for the implementation of the labor
    provisions of the agreement and reinforcement for the efforts of
    Central American governments that may be committed to full enforcement
    of labor laws but strapped for adequate resources.

    SUCCEEDING WHERE OTHER EFFORTS HAVE FAILED

        Improving labor laws to meet international standards, enforcing
    those laws, and strengthening the rule of law in general have proven to
    be difficult tasks in Central America. The legacy of long-standing
    undemocratic traditions and interest groups in some of the countries,
    along with the aftermath of civil wars, have combined to leave the
    region lagging in both economic and democratic development.
        The CAFTA negotiations present an excellent opportunity to make
    real progress in correcting these deficiencies and putting Central
    America on a course for sustained development in the coming decades.
    The prospect of full access to the U.S. market offers great leverage to
    induce reform from both governments and private-sector actors in
    Central America. Conversely, if this opportunity is wasted, it is hard
    to see how labor rights and the rule of law will be realized in the
    region in the foreseeable future.
        The proposal presented in this paper offers a roadmap for dealing
    with challenges that have been intractable until now. A key reason that
    this approach can succeed where Central American governments alone have
    not is that it aligns private sector incentives with public interests
    regarding good governance and rule of law. Under this proposal, the
    sooner firms comply with labor laws and provide acceptable treatment
    for workers, the sooner they will enjoy the benefits of full access to
    the U.S. market. This linkage of commercial rewards to firm behavior
    has been one of the key elements in the success of the U.S.-Cambodia
    Textile Agreement, and it can succeed in Central America as well. The
    successful, workable Cambodian model should be replicated in CAFTA.
        Real progress on labor rights and the rule of law in Central
    America demands a regional approach. Central American governments, in
    explaining the repeated failures of the rule of labor law in the
    region, have said that if they were to enforce their laws effectively,
    firms would simply move across the border to a neighboring country that
    did not. The proposal offered here reverses that dynamic by creating
    competition for successful labor law enforcement. If the country next
    door fails to enforce its laws or to meet international standards,
    access to the U.S. market will be delayed. Timely rewards will flow to
    countries that comply with their legal obligations, and those that do
    not will lose customers and investment.
        This proposal also benefits from using elements of other agreements
    and models that are already functioning effectively. These regimes can
    be examined. The governments involved can confer with one another.
    Private-sector actors, including firms and workers' organizations, can
    discuss experiences with their counterparts. The sharing of best
    practices by those who have already implemented the different aspects
    of these procedures can also help Central America move quickly up the
    learning curve. This will expedite the realization of the rewards that
    are possible through CAFTA, both in market access and in the more
    fundamental rewards of good governance and the wide enjoyment of the
    benefits of trade.

       Sandra Polaski is a senior associate with the Trade, Equity, and
    Development Project at the Carnegie Endowment for International Peace.
          She served from 1999-2002 as the Special Representative for
    International Labor Affairs at the U.S. Department of State, the senior
            official handling labor matters in U.S. foreign policy.

                             Carnegie Endowment for International Peace
                                                   Washington, DC 20036
                                                       January 15, 2002
    Regina Vargo
    Assistant United States Trade Representative for the Americas
    Office of United States Trade Representative
    Winder Building
    Washington, DC

        Communicated Electronically

    Dear Ms. Vargo:

        Federal agencies responsible for conducting environmental reviews
    of U.S. trade agreements are faced with a difficult challenge, but also
    with a chance to facilitate the development of trade agreements which
    contribute to the broader goal of sustainable development.
    Unfortunately, unless the United States Government modifies its
    approach in conducting the environmental review of the proposed U.S.-
    Central America Free Trade Agreement (CAFTA), in all likelihood it will
    be the fourth bilateral or regional trade agreement for which the U.S.
    determines that increased trade liberalization will result in a de
    minimis impact on the environment. While the direct effects of CAFTA on
    the U.S. environment may be de minimis, for Central American countries
    just the opposite will be true. As recent reports by the Inter-American
    Development Bank and the draft national action plans submitted by the
    governments of Costa Rica, Guatemala, and El Salvador demonstrate, our
    Central American trading partners recognize the importance of
    protecting their environment, but have not yet developed adequate
    infrastructures--such as sewage systems, waste water treatment plants,
    or solid waste disposal systems--necessary to mitigate the negative
    environmental impacts associated with export-led growth.
        We therefore urge you to broaden the scope of the U.S.
    environmental review of CAFTA to include the agreement's potential
    transboundary and global environmental impacts, arising from effects in
    the Central American region. We further recommend that the United
    States Government encourage our Central American trading partners to
    conduct their own environmental review of CAFTA, with financial and
    technical assistance offered by the U.S. for this purpose. Finally, we
    offer a number of steps that federal officials can take to make the
    CAFTA environmental assessment(s) a more meaningful tool for policy
    makers and other interested stakeholders in both the United States and
    Central American.

    Why Broaden the Scope of CAFTA's Environmental Review?

    1. Build Public Support for Environmental Reviews and Trade Policy

        Developing the implementation guidelines for the U.S. environmental
    review of trade agreements was a significant contribution made by the
    Members of the Trade and Environment Policy Advisory Committee (TEPAC).
    TEPAC Members and others within the environmental community concluded
    that the policy of conducting environmental reviews of trade agreements
    represented an important step towards reconciling trade and
    environmental policies. Since then, however, the environmental reviews
    conducted of the Jordan, Singapore, and Chile agreements have all found
    a de minimis effect on the U.S. environment.
        Repeated de minimis findings from environmental reviews run the
    risk of undermining public support for this potentially significant
    policy tool, one that was codified into law with the passage of trade
    promotion authority in the Trade Act of 2002. This is especially true
    when the potential for negative environmental consequences of trade
    liberalization among less developed U.S. trading partners is very real.
    Citizens in the United States and elsewhere want government officials
    to take seriously the implications of trade liberalization on
    environmental quality, but officials cannot do so if they are only
    given half the picture--that is, if they are only provided with
    information on a trade agreement's domestic environmental effects.
        The failure to broaden the scope of the U.S. CAFTA review to
    include transboundary and global environmental impacts--as well as the
    failure to support Central American countries' efforts to conduct their
    own environmental assessments for consideration--would represent a
    missed opportunity by the United States to demonstrate that trade and
    environmental policies can and should work together. Ten years ago the
    United States demonstrated leadership in this area by conducting
    environmental reviews of the North American Free Trade Agreement. That
    leadership fostered similar review policies in the European Union and
    Canada. More recently, by encouraging the Hashemite Kingdom of Jordan,
    Chile, and Singapore to conduct their own environmental reviews of
    FTAs, the United States is demonstrating to its trading partners and
    their citizens that trade policy negotiations can and should take the
    environment into consideration.

    2. Promote Win-Wins for Trade and the Environment

        U.S. commitment to considering CAFTA's potential environmental
    impacts both domestically and within the Central American countries
    would better facilitate the joint consideration of appropriate policy
    responses to these effects. Given the size of the U.S. economy,
    expanding trade with small Central American economies will rationally
    have no measurable effect on the United States' domestic environment,
    at least directly. On the other hand, the expanded production within
    Central America of goods for export to the U.S. market likely will have
    environmental consequences in the region. The U.S. and Central American
    countries have an established history of working together to promote
    sound environmental management in the region, most notably under the
    auspices of the USAID Ambiental Regional para Centroamerica (PROARCA)
    project. Environmental assessments of the proposed CAFTA should be used
    to strengthen existing partnerships for environmental protection, by
    suggesting areas where attention will be required to mitigate negative
    environmental impacts, as well as by highlighting ways that trade can
    be harnessed to directly promote sustainable development.
        U.S. interest in promoting international sustainable development
    stems in part from the recognition that environmental challenges are
    often regional or global in scale. The geographic proximity of Central
    America and the U.S.--as well as our significant imports of Central
    American produce and the increasing movement of people across our
    national borders--signal that some environmental problems arising in
    Central America will directly affect the environment and public health
    in the United States. In order to correctly identify domestic impacts,
    the U.S. must address potential transboundary and global issues in its
    environmental review of CAFTA.
        Transboundary pollution--for example from industry, pesticide use,
    or the open burning of solid waste--can contribute to ecosystem
    degradation, negative health effects, and the transport and deposition
    of persistent organic pollutants (POPs) in the United States. Current
    U.S. Environmental Protection Agency (EPA) programs in Central America
    lend insight into what types of issues might need additional attention
    in the context of CAFTA. With funding from USAID, the EPA has helped
    to:

         Limprove food safety for fresh produce imported from
    Central America;
         Lreduce the inventory of stockpiled obsolete pesticides
    throughout the region;
         Llaunch projects on municipal wastewater treatment and
    integrated solid waste management;
         Lintroduce cleaner production practices for private firms;
         Land establish regional networks of environmental lawyers,
    experts, and environmental engineers.

        Exploring the intersections between trade and environmental policy
    should not be limited to mitigating negative environmental impacts. As
    one example, the U.S. environmental review should consider the possible
    consequences of supporting Central American farmers to engage in
    sustainable agriculture for export to the U.S. niche market of organic
    foods. Research conducted by International Center of Economic Policy
    (CINPE) suggests that this would allow farmers to achieve a higher
    standard of living, while reducing the use of harmful pesticides and
    fertilizers. Supporting sustainable development and poverty alleviation
    in Central America is again sound foreign policy, as the U.S. will
    benefit from having more stable, prosperous neighbors.

    3. Promote Good Governance and Capacity Building

        The Bush Administration rightly links technical and financial
    support to its belief in good governance. Most of our Central American
    trading partners do not have a strong history of public involvement in
    policymaking, supporting their efforts to conduct a national
    environmental assessment of CAFTA would be an important step towards
    better governance. Conducting an environmental assessment involves
    engaging the public in discussion about trade's possible impacts on the
    environment. Public involvement in turn results both in stronger
    immediate data and in more effective implementation of subsequent
    policy. Through its domestic and international experience with
    environmental protection efforts, the EPA has ``clearly demonstrated
    the importance public participation . . . in assuring meaningful and
    sustainable results.''\1\
    ---------------------------------------------------------------------------
        \1\ U.S. Environmental Protection Agency (November 1999), ``Best
    Practices for EPA's International Capacity-Building Programs.''
    ---------------------------------------------------------------------------
        Beyond promoting democratic governance, conducting environmental
    reviews builds the capacity of our trading partners to protect their
    environment for two additional reasons. First, the assessment process
    involves a transfer of skills and technology from one country to the
    other, as scientists, government officials, and civil society
    organizations explore the environmental implications of trade
    liberalization. Second, assessments encourage better interaction among
    government ministries, thereby improving efforts to coordinate policy.
    The draft national action plans submitted by the governments of Costa
    Rica, Guatemala, and El Salvador each demonstrate the need to
    strengthen interagency cooperation and coordination on trade policy, as
    well as to increase public involvement.

    Steps Forward

        Executive Order 13141 Section 5(b) states that, ``As a general
    matter, the focus of environmental reviews will be impacts on the
    United States. As appropriate and prudent, reviews may also examine
    global and transboundary impacts.'' With these instructions in mind, we
    recommend the following steps:
        1. Broaden the Scope of the U.S. CAFTA Environmental Review to
    Include Global and Transboundary Impacts: Executive Order 13141
    Guidelines Section IV(B)(4) enables the Trade Policy Staff Committee to
    place a high priority on global and transboundary impacts of expanded
    trade. These impacts are at this writing not likely to be identified as
    part of the International Trade Commission's report on the potential
    impacts of trade liberalization with Central America, so federal
    officials should not wait for this report to initiate their own
    examination of the broader implications. Instead, consistent with
    Guidelines Section IV(B)(2)(f)(3), the Environmental Review Group
    should consult with environmental experts from Central America and the
    United States to obtain information that will help determine the
    potential global and transboundary environmental impacts of CAFTA.
        2. Coordinate Technical Assistance: Under the auspices of the
    United States Aid for International Development's Ambiental Regional
    para Centroamerica (PROARCA) project, since 1995 U.S. federal agencies
    have assisted Central American nations to increase effectiveness in
    regional stewardship of the environment and key natural resources in
    target areas. PROARCA's contribution to the enhancement of Central
    American environmental protection efforts is consistent with the goals
    of the Central American-United States of America Joint Accord
    (CONCAUSA), signed on the margins of the 1994 Miami Summit of the
    Americas. Renewed in 2001, CONCAUSA covers cooperation in four major
    areas under an action plan: conservation of biodiversity, sound use of
    energy, environmental legislation, and sustainable economic
    development. As discussed above, a comprehensive environmental
    assessment of CAFTA has the potential to utilize and strengthen this
    existing cooperation. The Environmental Review Group should be in
    contact with U.S. PROARCA participants, and use their relationships to
    liaison with government officials and environmental experts in Central
    America. This exercise should take place as soon as possible.
      3. Communicate through U.S. Embassies: It is important to conduct the
    U.S. review of global and transboundary impacts in a manner respectful
    of sovereignty issues that may be raised as a result of an extra-
    territorial review. Likewise, it is essential that the United States
    clearly communicate the types of support it is able to provide to help
    trading partners conduct their own environmental assessments. With
    these two objectives in mind, U.S. Central American embassy officials
    should be instructed to contact government officials at economic,
    environmental, and development agencies to discuss U.S. interest in a
    more comprehensive environmental review process.
      4. Report findings early to Congress: Members of the Congressional
    Oversight Group should be briefed regarding this initiative. USTR and
    relevant federal agencies should also brief other committees with
    interest in this effort, in particular, the Senate Environment and
    Public Works Committee and the House Resources Committee.
        USTR Ambassador Robert Zoellick has demonstrated that he
    understands the importance of factoring environmental issues into trade
    agreements. In our opinion, under his leadership the United States
    government has made progress in this regard and helped to overcome the
    interagency tensions that repeatedly surfaced during the administration
    of President Bill Clinton. To continue to move forward, the United
    States must now expand the scope of its environmental review process
    for trade agreements, both by considering global and transboundary
    impacts in all U.S. reviews, and by supporting U.S. trading partners'
    efforts to conduct and share their own assessments for joint
    consideration.
                Sincerely,
                                                         John J. Audley
                                                       Senior Associate

                                                          Vanessa Ulmer
                                                          Junior Fellow

                        [BY PERMISSION OF THE CHAIRMAN]

                   Statement of CENCIT, Guatemala, Guatemala
        In 1994 the Coordination Committee of Agricultural, Commercial,
    Industrial and Financial Associations, CACIF, created the CENCIT. The
    CENCIT is aspecialized commission formed from the Guatemalan private
    sector and maintains an entrepreneurial structure as a counterpart to
    the governmental entities in charge of the negotiations, as well as to
    apply the international trade negotiation policies in an efficient and
    orderly way. The Members of the CENCIT are entrepreneurs and
    professional staff from each of the Guatemalan private associations and
    chambers\1\.
    ---------------------------------------------------------------------------
        \1\ AGEXPRONT, AZAZGUA, Camara del Agro, Camara de Comercio, Camara
    de Finanzas, Camara de Industrustria, Camara de la Construccion,
    FEPYME.
    ---------------------------------------------------------------------------
        The participation of the Members of the CENCIT in the negotiations
    of free trade agreements and within the framework of the World Trade
    Organization, WTO, has fostered the development of an adequate
    consultation and information exchange system between the private sector
    and the responsible government officials. Over the years, the CENCIT
    has developed a comprehensive information system regarding production
    chains, statistics and trade-related issues. Additionally, our team of
    specialized professionals has accumulated precious experience and
    understanding of current trade issues and their effect on Guatemala.
        From the time when President Bush proposed the negotiation of a new
    free trade agreement with the Central American countries, the CENCIT
    has been working intensely to reach a consensual position among the
    Guatemalan private sector. We are also working on strengthening the
    communication channels with the current Administration, aiming to
    exchange information on the production chains of the country and how
    they would benefit, or be affected, by trade liberalization.
        Traditionally, the United States has been our most important trade
    partner and the Central American countries are our second largest
    export market. Therefore, we consider the negotiation of the Free Trade
    Agreement between the United States and the Central American Countries,
    CAFTA, as the current most important trade policy undertaking.
    Certainly, the negotiation and successful conclusion of the Agreement
    will intensify the Central American integration process, which has been
    staled over the last years. Furthermore, it should become a building
    block of the Free Trade Area of the Americas, FTAA, and strengthen the
    global trade liberalization process taking place in the framework of
    the WTO.
        Since the Caribbean Basin Initiative, CBI, and the Generalized
    System of Preferences, GSP, entered into force for Guatemala, the great
    majority of our export products has benefited from preferential access
    to the U.S. market. Undoubtedly, these preferential schemes have
    fostered the growth of our exports and played a key role in the
    economic diversification and growth of the country. Moreover, the CBI
    and GSP have contributed to the generation of employment, creating more
    than 400,000 export-related jobs. In the light of the CAFTA
    negotiations, one of our main objectives is to consolidate and improve
    the benefits that both preferential schemes have generated and to
    broaden the scope of preferential access of Guatemalan products to the
    U.S. market.
        In Guatemala, agriculture-related activities account for 24% of the
    Guatemalan Gross Domestic Products, GDP. Taking into account the
    plummeting of the international market prices of our traditional
    commodities, the diversification of the agricultural production, as
    well as the negotiation of stable market access conditions for our
    products have become a national priority. In order to guarantee market
    access for our agricultural fresh and processed products, the
    Guatemalan private sector is working together with the responsible
    governmental entities to create state of the art certification bodies
    and laboratories of analysis, as well as train accredited inspectors,
    in order to comply with international sanitary and phytosanitary
    requirements.
        The industrial sector has also taken steps towards modernization,
    manufacturing a wide range of products, from wooden furniture to
    pharmaceutical products. The implementation of world-class quality
    assurance and modern production systems has guaranteed the
    competitiveness of Guatemalan manufactured products all over the world.
    Due to our geographical location, Guatemala is a potential industrial
    hub for U.S. companies, which can take advantage of the short distance
    between Guatemala and major U.S. cities.
        During the last years, the growth of the apparel and textiles
    industry has been remarkable, generating more than 130,000 jobs. The
    CBI enhancement has benefited not only the Guatemalan industry, but
    also the U.S. textile-related industry as shown by the yearly imports
    of components, totaling U.S. $111 millions. Taking into account the
    benefits generated by this sector, we aim to improve the market access
    conditions of the Guatemalan textile and apparel products to the U.S.
    market.
        Guatemala has also carried out the modernization and liberalization
    of the services sector. Nowadays, the liberalization of
    telecommunications, as well as electric energy generation and
    distribution have benefited consumers all over the country, since more
    people have access to these services, mainly in the countryside.
    Moreover, our Telecom Act has been presented in several occasions as an
    international example for a modern and efficient legal framework and
    Guatemala has received large amounts of foreign investment due to the
    privatization and liberalization of services. We expect that the CAFTA
    will offer better, more efficient and affordable services, which are
    the backbone of our business activities.
        We expect that the negotiation and subsequent entering into force
    of the CAFTA will encourage U.S. investors to establish operations in
    Guatemala. Definitely, as the experience of many other countries shows,
    foreign direct investment will create new and better jobs, accelerate
    technology and know-how transfer, as well as diversify our economy and
    broaden the export supply. However, we would like to highlight the fact
    that special national interests and needs, as well as corporate ethics,
    should be taken into account when promoting foreign direct investment.
    The organized private sector is working permanently on the improvement
    of the business environment and also to streamline the proceedings
    required to start operations in the country. We also look forward to
    strategic alliances and cooperation among companies.
        The implementation of international labor standards has already
    started in Guatemala, as the creation and application of the ``Code of
    Conduct'' of the apparel and textiles industry shows. Currently, this
    trend is spreading rapidly to other sectors such as agriculture and the
    manufacturing industry. Furthermore, private companies have developed
    state of the art labor standards as part of their corporate
    responsibility. We are certain that we will advance social development
    in Guatemala through better employee-employer relationships and we look
    forward to an efficient and correct enforcement of labor standards
    throughout the country. Therefore, we would like to request the
    inclusion of a positive incentives labor provision in the CAFTA,
    emulating the ``quota-plus'' approach, which was proposed during the
    Hearing by the Honorable Sander Levin for the Vietnam Textiles
    Agreement.
        Guatemala is a small country, but it is enormously rich in
    biodiversity and natural resources. Tourism is our second source of
    foreign currency and most of the tourists come to visit our natural and
    cultural treasures. On the other hand, we still have to discover the
    uses and benefits of the majority of tropical natural products, as well
    as preserve our fauna and flora. Consequently, preserving the
    environment is a crucial factor to achieve sustainable development. We
    are keen to undertake the protection of our environment, but without
    turning these protection efforts into unnecessary barriers to trade.
        On the issue of the protection of intellectual property rights,
    Guatemala has developed a modern legal framework in order to comply
    with the acquired international obligations. Nevertheless, in the light
    of the current U.S. patent-protection policy, there is a deep concern
    regarding the access to affordable drugs and essential medicines, as
    well as reasonably priced technology products. These issues are being
    discussed at the multilateral level, within the framework of the WTO
    and the World Intellectual Property Organization, WIPO, and developing
    countries have urged industrialized countries to reconsider their
    patent--related negotiating positions. For this reason, we would like
    to urge your committee to recommend the United States Trade
    Representative to consider the special health and developing needs of
    the Central American countries in the light of the protection of
    intellectual property rights.
        A further topic that we would like to bring to your attention is
    transparency. Since the launching of the CAFTA negotiations last
    January, our concern has grown due to the lack of information and
    access to U.S. proposals resulting from the confidentiality
    requirements set out by the United States Trade Representative. This
    unnecessary secrecy has undermined the advisory and consultation
    functions of the CENCIT and creates room for misinterpretations and
    rumors. Certainly, the CENCIT would like to have a more active
    participation in the CAFTA negotiations in order to reach fruitful
    results for Guatemala. Observing the delay in the publication of the
    texts from the free trade agreements already signed by the U.S. with
    Singapore and Chile, we would like to encourage your Committee to
    strengthen and oversee transparency in U.S. trade policy, as well as in
    ongoing and future negotiations.
        Considering that the CAFTA will have medium and long-term effects
    in our economy and trade relations, we would like to express our
    sincere interest in presenting proposals for cooperation projects
    designed to tackle the asymmetries between our economies and to
    increase the competitiveness of our products and services. We are very
    interested in the U.S. experience dealing with structural changes,
    which have resulted from the trade diversion generated by the
    liberalization of certain sectors. Additionally, we are looking forward
    to the U.S. experience on the implementation of an efficient
    competition policy, which will certainly have a positive impact on the
    Central American economies. The private sector has successfully carried
    out several projects with international funding, as well as social
    responsibility projects funded by enterprises, chambers and
    associations, which have delivered palpable results and progress for
    Guatemala. We are willing to sit down with cooperation officers to
    design viable projects and to carry out their execution until the
    objectives are reached.
        We see the CAFTA as an Agreement having a great potential to foster
    the sustainable development of Guatemala and our fellow Central
    American nations, as well as an instrument to reduce poverty all over
    the region. Taking into account our experience in the negotiation of
    other free trade agreements, like the ones with Mexico, the Dominican
    Republic and Chile, we believe that this agreement should balance the
    different levels of economic development and special needs of each of
    the negotiating parties so as to deliver an Agreement that is
    beneficial for all. Indisputably, trade is the correct manner to attain
    economic development for small economies such as the Central American
    countries and thus we are committed to keep working on the CAFTA
    negotiations.

    Statement of William A. Hagedorn, Comstock & Theakston, Inc., Oradell,
                                   New Jersey
    I. LInclusion of Full Drawback Rights in FTAs Will Provide Significant
            Benefits to U.S. Companies

        Many imports are subject to Normal Trade Relations (NTR) duty rates
    when imported into the U.S. Therefore, to include in any FTA a
    restrictive drawback program like that in NAFTA, and thus limit
    drawback, would place U.S. companies at a significant competitive
    disadvantage against our trading partners.
        Duty drawback reduces production costs and operating costs by
    allowing manufacturers and exporters to recover duties that were paid
    on imported materials when the same or similar materials are exported
    either as finished products or as component parts of a finished
    product. This advantage must be maintained as part of U.S. policy to
    foster growth and development within the U.S. and to increase U.S.
    export competitiveness abroad.

    II. Drawback Encourages Growth in U.S. Manufacturing and Exports

        The legislative policy underlying the duty drawback program is to
    increase the competitiveness of U.S. industry in the global market when
    competing against lower-priced exports from our trading partners. The
    drawback program benefits U.S. manufacturers and exporters by enhancing
    their competitiveness in providing an advantage either at the margin
    for pricing goods in the export market or at the lower overall costs of
    production.
        The drawback program was initiated to create jobs and encourage
    manufacturing and exports. Customs recognizes this by stating that

            L  The rationale for drawback has always been to encourage
            American commerce or manufacturing, or both. It permits the
            American manufacturer to compete in foreign markets without the
            handicap of including in his costs, and consequently in his
            sales price, the duty paid on imported merchandise.

        Clearly, the intent of Congress is to grant drawback when and
    wherever possible to the benefit of U.S. companies, not to limit
    drawback simply because the U.S. enters into a FTA that reduces import
    tariffs with the FTA partner. To do so defeats the purpose of the
    program and the FTA, which purpose is to provide the greatest overall
    benefits to U.S. exporters.

    III. LThe Rationale for Restricting Drawback Rights in FTAs No Longer
            Exists

        The rationale for restricting drawback rights in FTAs no longer
    exists, and no empirical evidence has surfaced that would lead one to
    believe otherwise. There were two primary reasons for restricting
    drawback in a FTA, both of which have been proven false. First, it was
    believed that drawback restrictions were necessary to create a
    disincentive for the development of export platforms, yet such
    restrictions have had an effect adverse to that intended. Second, it
    has been said that drawback is an export subsidy that should be
    eliminated. However, according to the WTO's Agreement on Subsidies and
    Countervailing Measures, drawback does not constitute an export
    subsidy.

              LA. Restricting Drawback Actually Encourages, Rather than
            Discourages, the Creation of an Export Platform

        The continued proliferation of free trade agreements makes the U.S.
    position about export platforms a moot point, with no empirical
    evidence to substantiate the premise. The negotiating position of the
    U.S. in NAFTA was that the elimination of duty drawback was necessary
    to create a disincentive for Asian and European countries to establish
    export platforms in Mexico or Canada to the detriment of U.S.
    manufacturers and suppliers of inputs. However, in anticipation of the
    restrictions on duty drawback, a number of companies with Maquiladora
    and PITEX operations in Mexico convinced suppliers in Asia and Europe
    to establish parts production facilities in North America to replace
    imports from non-NAFTA sources. Furthermore, many maquiladora
    representatives from Japan, Korea, Taiwan, the United States, and
    Mexico have been unable to locate suitable component suppliers in North
    America. These officials requested Mexican officials to consider
    additional financial incentives. Without incentives to compensate for
    increased costs due to the drawback restrictions in NAFTA Article 303,
    some companies using maquiladora operations have searched for
    opportunities in other countries.
        Over time, and with the imposition of NAFTA Article 303 drawback
    restrictions, our NAFTA trading partners have instituted trade policies
    to diminish the financial impact on domestic manufacturers of the duty
    drawback restrictions contained in the NAFTA. The U.S. has done nothing
    to counter the same adverse impacts on U.S. manufacturers and
    exporters. For example, in anticipation of the adverse economic impact
    on its maquiladoras that Article 303 would have, Mexico instituted its
    Sectoral Promotion Programs (``PPS''). Under the PPS, Mexico reduced
    many of its NTR duty rates so that domestic manufacturers could obtain
    non-NAFTA inputs with the least adverse economic impact as drawback
    became restricted. In addition, Canada reduced its NTR duty rates so
    that the imposition of the drawback restrictions under NAFTA had the
    least adverse economic impact upon domestic manufacturers. These
    actions not only circumvent the original intent of drawback
    restrictions as relates to the creation of an export platform, but also
    demonstrate that the premise is fallible. It is expected that if
    drawback restrictions are included in other FTAs, our trading partners
    will take similar actions to ensure that their domestic companies can
    obtain the necessary inputs at the lowest possible cost rather than
    obtain them from the U.S. Thus, the analysis for the need to restrict
    duty drawback based on the creation of export platforms has proven
    false over time.

              LB. Duty Drawback is Not an Export Subsidy, and It Creates
            Incentives and Advantages for Domestic Manufacturers and
            Exporters

        Almost every country has a drawback program. Duty drawback is one
    of the few GATT/WTO-sanctioned programs used by the U.S. The WTO has
    commented that the drawback programs in other countries, as well as
    that in the U.S., have the following positive effects: ``Creates an
    export incentive; counteracts the negative effects of high import
    tariffs; establishes a strong magnet for export-oriented foreign direct
    investment; provides benefits to exporters and manufacturers; and,
    removes a bottleneck to private sector development''.
        According to the WTO, as well as to the intention of Congress and
    over 200 years of experience, duty drawback promotes, encourages and
    benefits exports. Workers in exporting industries have greater
    productivity and higher wages than do workers in other industries.
    Export promotion programs such as drawback are necessary to encourage
    exports and enhance U.S. competitiveness abroad.

    IV. LIt is Illogical for the U.S. Government to Remove Export
            Incentives for U.S. Manufacturers and Exporters

        The U.S. should not remove WTO-legal export incentives for U.S.
    companies, but rather strengthen the existing incentives and provide
    any additional incentives and competitive advantages to U.S. companies
    that would allow them to win contracts for the sales of goods and
    services abroad.
        The U.S. strategy for entering into FTAs is to lower the overall
    tariff burden for U.S. companies when exporting to the particular
    trading partner, thereby making U.S. companies more competitive in the
    particular market or region. However, as in the case of Mexico and
    Canada when countries lower their own NTR duty rates to rates that
    match the level contained in a free trade agreement with the U.S., any
    drawback limitations becomes punitive to U.S. companies, as the
    advantage provided to them by the FTA is diminished when foreign
    exporters receive the same or similar benefits (plus drawback, in many
    instances). The result is a decrease in the competitiveness of U.S.
    companies.

                                      E.I. du Pont de Nemours & Company
                                                   Wilmington, DE 19868

    Dear Sir:

        Thank you for providing us with the opportunity to comment on
    issues relating to current trade issues. E.I. DuPont de Nemours and
    Company is a Fortune 500 Company operating as a global enterprise in 70
    countries around the world. Our U.S export sales in excess of $4.6
    billion represent 19 percent of sales, making DuPont one of the largest
    U.S. exporters. As such, it is incumbent on us to address one of the
    aspects of the trade agreements, specifically, duty drawback.
        While the initial U.S. duty drawback law dates back more than 200
    years, the underlying concept remains the same today--to encourage
    American commerce. It permits industry to compete in foreign markets
    without the added burden of including import duties in its costs and
    sales price. Duty drawback reduces production and operating costs by
    allowing manufacturers and exporters to recover duties that were paid
    on imported materials when the same or similar materials are exported
    either as finished products or as component parts of a finished
    product.
        Industry should not be penalized by the reduction or elimination of
    duty drawback simply because the U.S. enters into a FTA that reduces
    import tariffs. Drawback should be maintained as part of the agreements
    to continue to foster growth and development within the U.S. and to
    increase U.S. export competitiveness off-shore.
        We hope you consider this perspective as you develop additional
    trade agreements.
                Sincerely,
                                                             J.S. Kempf
                                                 Manager, Duty Drawback

                                         Electronic Industries Alliance
                                              Arlington, Virginia 22201
    Ways & Means Committee
    U.S. House of Representatives
    Via E-mail

    Members of the Committee:

        The Electronic Industries Alliance (EIA) appreciates the
    opportunity to comment on the Committee's February 26 hearing on U.S.
    trade policy and on the U.S. trade agenda. Our comments today focus
    primarily on the Chile and Singapore free trade agreements but in many
    areas are likely to apply to broader trade policy as well.
        EIA is an alliance of high-tech associations and approximately
    2,500 Member companies whose products range from the smallest
    electronic components to the most complex systems used by government
    and industry, including the full range of consumer electronic products.
    U.S. electronics is a $430 billion industry that provides 1.8 million
    jobs for U.S. workers. In 2001, about 40% of U.S. produced
    electronics--more than $170 billion in goods--was exported overseas.
        We would like to express our pleasure on the recently completed
    negotiations to enter into free trade agreements (FTAs) with Singapore
    and Chile. EIA appreciates USTR's release for public review the U.S.-
    Singapore FTA text and looks forward to the similar release of the
    U.S.-Chile FTA text, which we hope will be in the very near future.
        Based on the texts and summaries released by USTR, the U.S.-
    Singapore and U.S.-Chile FTAs embody a broad range of market-
    liberalization commitments that will facilitate international trade and
    investment with these countries and are necessary to promote long-term
    economic growth. Both FTAs will benefit the electronics industry as a
    whole and are noteworthy for the following commitments:
        Tariff Elimination: Singapore's commitment to immediate duty-free
    treatment for U.S. exports to Singapore and Chile's commitment to
    eliminate tariffs immediately on 85% of imports--in key sectors such as
    computers and other information technology--provide immediate benefits
    to U.S. manufacturers. It is noteworthy that the FTA with Chile marks
    the first time that a major South American country has embraced the
    duty reduction commitments reflected in the 1996 Information Technology
    Agreement (ITA). In future FTAs, EIA suggests that for certain
    sensitive product areas USTR and Congress consider flexible mechanisms
    for reducing tariffs, such as the ITA that reduces tariffs equally in
    staged reductions.
        E-Commerce Liberalization: Both agreements contain commitments in
    this area that are more advanced than any negotiated under the World
    Trade Organization. The FTAs provide non-discriminatory treatment to
    products delivered electronically, which will benefit U.S. firms that
    sell digital products over the Internet. Parties to the agreements also
    agreed to prohibit customs duties charged on these electronically
    delivered products.
        Intellectual Property Protection: We appreciate the strong
    protection for copyrighted works that permits the growth of digital
    technologies and products while still protecting the legitimate rights
    of copyright owners, reflecting the balance struck in the U.S. Digital
    Millennium Copyright Act. Moreover, strong enforcement provisions
    criminalize end-user piracy and commit both Singapore and Chile to
    seize, forfeit and destroy counterfeit and pirated goods and the
    equipment used to produce them. These protections will apply to goods-
    in-transit and mandate both statutory and actual damages under Chilean
    and Singaporean law for IPR violations.
        Telecommunications Market Access: Both agreements provide for open
    markets and non-discriminatory access to telecommunications networks.
    We are particularly pleased that specific provisions in the Singapore
    agreement have been included to ensure national treatment among service
    providers, protection against anti-competitive behavior, transparent
    procedures for access to unbundled network elements and transparency in
    licensing procedures. Moreover, we strongly support the affirmation of
    the principle of technology choice by public telecommunications service
    providers. These and other provisions will contribute to open and
    transparent telecommunications markets for both service providers and
    equipment suppliers.
        While we are pleased with most aspects of the Chile and Singapore
    FTAs and with the potential that both offer for economic growth and
    improved trade relations, we do have two areas of concern:
        Rules of Origin: There is a general consensus that the NAFTA rules
    of origin are highly complex and that rules of origin for future FTAs
    need to be much simpler. Complex rules of origin impose unnecessary
    administrative burdens on companies and raise the cost of doing
    international business. Moreover, we understand that the rules of
    origin for the U.S.-Chile FTA may serve as the model for future
    agreements. Accordingly, we recommend that the rules of origin for the
    U.S.-Chile and U.S.-Singapore FTAs be simplified so that companies that
    are entitled to the benefits will not be deterred from capitalizing on
    them because of prohibitively high administrative costs. This
    simplification can be accomplished through a straight tariff shift-only
    approach, whereby an item moves from being one good to another in the
    course of manufacturing. We would note that a straight tariff shift-
    only approach might include a minimum regional value content (RVC)
    requirement.
        Duty Drawback: The duty drawback program, administered by the U.S.
    Customs Service, is one of the last remaining export promotion programs
    to help U.S. companies compete in the global marketplace against
    trading partners that have significantly lower costs of production. We
    understand from the U.S.-Chile FTA summary released by your office that
    drawback will be phased out over a 12-year period. We believe that by
    phasing out drawback in each FTA, the elimination of this program is
    being accelerated as it relates to tariff elimination worldwide, since
    we do not know when, or if, tariffs will truly be eliminated. At the
    very least, the European Union-Chile FTA language would be preferable
    as it has an opt-out provision allowing exporters and importers to
    choose between drawback and a duty preference. By eliminating drawback
    in the U.S.-Chile FTA, the U.S. will be placed at a competitive
    disadvantage against our E.U. trading partners that have more
    preferable drawback language in the E.U.-Chile FTA.
        FTAs such as those negotiated with Singapore and Chile ensure that
    U.S. manufacturers and exporters remain competitive in the global
    marketplace and enhance the prospects for successful multilateral trade
    talks, including the Free Trade Area of the Americas and the Doha round
    of WTO negotiations.
        In light of these future negotiations, we would like to note one
    final concern. Although it is not addressed in either the Chile or
    Singapore FTA, we feel the issue of foreign levies on digital products
    is one that must be raised now because of the potential for these
    agreements to be used as models for future negotiations. The
    propagation of levies on digital products--including PCs, audio/visual
    products and other electronics--is emerging as a worrisome trade
    barrier. These levies are being imposed by E.U. countries, Canada,
    Mexico and others and are a threat to U.S. manufacturers' ability to
    offer products at lower prices. With this concern in mind, we would
    urge USTR and Congress to include the prohibition of levies on digital
    products in future U.S. trade negotiations.
        Thank you for the opportunity to comment.
                Respectfully submitted,
                                                            Brian Kelly
                                                  Senior Vice President
                                Government Relations and Communications

                        [BY PERMISSION OF THE CHAIRMAN]

                                                   Embajada De Honduras
                                                   Washington, DC 20008
                                                         March 12, 2003
    The Honorable William Thomas, Chair
    The Honorable Charles Rangel, Ranking Minority Member
    Committee on Ways and Means
    U.S. House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    Dear Sirs:

        Honduras applauds President Bush and Ambassador Zoellick's
    commitment to negotiate a Central American Free Trade Agreement (CAFTA)
    by the end of the year. Honduras is prepared to do its part to make
    that happen. Honduras also thanks the Congress, this Ways and Means
    Committee, and the other Members who helped make the United States-
    Caribbean Basin Trade Partnership Act (CBTPA) a reality in both the
    Trade Development Act of 2000 and the Enhanced CBTPA which was enacted
    in the Trade Act of 2002. The negotiation of a commercially viable
    CAFTA will expand on the substantial benefits which have been realized
    by the U.S. and Central American textile and apparel industries as a
    result of the passage by the Congress of CBTPA.
        This testimony focuses on the textile and apparel industry in
    Central America. This is not to minimize the importance of agriculture,
    or the other sectors, but to highlight the importance of the prompt
    negotiation and implementation of CAFTA as it applies to textile and
    apparels. The expiration of the WTO's Multi-Fiber Arrangement in
    January 2005 will dramatically change the rules in international trade
    that govern the textile and apparel industry. Therefore, it is crucial
    to the economic survival of the U.S. and Central America textile and
    apparel industries that CAFTA be negotiated promptly.
        Honduras is the third largest exporter of apparel to the United
    States after Mexico and China. It's textile and apparel industry,
    according to 2002 statistics, represents over 26% of the employment in
    Honduras. In 2002, it employed 107,396 Hondurans. The 2002 employment
    figures are reduced from the height of maquila employment in 2000 of
    125,608 employees.
        This Committee, the Congress, and previous Administrations' vision
    and support have had a major beneficial impact on the U.S. industry and
    the industries of Honduras and the other Central American and CBI
    countries. The growing strategic relationship among our industries
    indicates your support for both CBTPAs and demonstrates the fallacy of
    the positions taken by protectionist industries in the United States
    which held up the passage of CBTPA and the expansion of the textile and
    apparel sectors for approximately seven years. Negotiations between the
    Central American countries and the United States for CAFTA will
    significantly impact Honduras', the Central American, and the U.S.',
    world textile markets post-January 1, 2005. For this reason, and the
    facts set forth in this statement, Honduras urges the Congress and the
    Administration to support a commercially viable CAFTA that is agreed to
    by the end of this year.

    I.  Current Situation

        While the passage of CBTPA, in 2000, was expected to give a boost
    to employment in textiles and apparel in Honduras, and the other
    Central American countries, the delayed implementation of the 2000
    Trade Development Act, coupled with the U.S. Customs Service
    contradictory interpretations, and worldwide economic slowdown
    prevented this. This situation was caused by the efforts of some of the
    protectionist companies and groups in the U.S. textile and apparel
    industry to undercut the pro-trade provisions. In fact, it cost
    Honduras approximately 15,000 jobs in the maquila sector. A similar
    situation occurred in other Central American countries, and in the
    United States.
        The passage of enhanced CBTPA in 2002 and changes in the worldwide
    textile and apparel market, however, seem to have reversed that trend.
    It appears that 2003 will return to a level of activity that will
    result in employment for over 120,000 workers. The textile and apparel
    industry in 2004 and 2005 are projected to grow and the Asociacion
    Hondurena de Maquiladores (Association of Honduran Maquiladors, or AHM)
    projects that approximately 130,000 workers will be employed in 2004
    and 143,000 in 2005.
        It should be noted that each maquila employee creates substantial
    multipliers. For example, the employment of 107,396 Hondurans in 2002
    supported another 536,980 direct dependents. It also supported
    1,073,960 indirect jobs in Honduras. For purposes of these figures the
    company workers work directly for the manufacturing companies; while
    direct dependents include employees for service companies that provide
    services to the maquila companies and other similar supporting jobs;
    and lastly indirect jobs include businesses such as restaurants,
    laundries, home construction, banks, which provide general services
    that depend on the economic activities of the maquilas or the support
    industry. It must be understood that in 2002 the annual per capita
    income in Honduras is $850, while AHM calculates that the average
    annual salary for maquila workers was $3,717.62. Textile and apparel
    workers in Honduras are paid substantially more than other Honduran
    workers who lack advanced degrees, technical training, or education.
        Total textile and apparel exports from Honduras in 2001/2002 to the
    United States had a customs value of $2,287.6 billion dollars. In
    exports of apparel alone to the U.S., Honduras was ranked number three
    worldwide, after Mexico and China, with a custom value of $2,284.2
    billion. Comparing Square Meter Equivalents (SMEs) of apparel to the
    United States for the year ending 2002, Mexico exported 2.14 billion
    SMEs of apparel to the United States, China 1.14 billion SMEs and
    Honduras 990 million SMEs. In terms of SMEs of apparel, Honduras was
    followed by Bangladesh, Hong Kong, the Dominican Republic, El Salvador,
    Korea, and Taiwan. Comparison data demonstrates the importance of the
    Central American and CBI region in terms of total U.S. imports of
    textiles and apparel for the year ending June 30, 2002. The CBI region
    was second to Mexico in SMEs, and first in terms of customs value. For
    apparel alone, the CBI region was first in terms of both SMEs and
    customs value; with Central America second in SMEs.
        It is also clear that CBI, CBPTA, and enhanced CBPTA are, at least
    partially, responsible for the growth of this industry. In 1990, 27% of
    Honduras' exports to the United States were non-traditional (textile
    and apparel) and 73% were traditional imports (bananas, coffee, sugar,
    fish, etc.). By 2001, the figures were reversed with non-traditional
    products (textiles and apparel) representing 70% and traditional
    exports (bananas, coffee, etc.) representing 30%.
        These statistics demonstrate that January 1, 2005 is a watershed
    period of potential dislocation for Honduras and the other Central
    American and CBI countries. On the world stage, in textile and apparel,
    Honduras and the other Central American republics are competitive and
    major players in the United States market under existing laws,
    regulations, and programs. While no one can accurately predict what
    January 1, 2005 (less than two years from now) will bring, it is clear
    that any change could be dramatic and detrimentally impact the current
    economies of the Central American and CBI countries, including
    Honduras.
        In this context, Honduras would like to point out that in the
    launch of the CAFTA negotiations on January 8, the United States Trade
    Representative (USTR) made the point that the United States intends to
    model CAFTA on the U.S.-Chile Agreement. This is of great concern to
    Honduras because at least in the textile and apparel sector, such a
    negotiating position by the United States could be potentially damaging
    to Honduras and to Central America. As I have previously pointed out,
    Honduras and the other Central American and CBI countries are major
    players in the world textile and apparel manufacturing industry,
    exporting between 14 and 16% of the world production to the United
    States. This amount is comparable to Mexico and China. Chile, on the
    other hand, is not comparable. It is 103rd in worldwide rankings and
    not a factor in the worldwide textile and apparel industry. For example
    the customs value of Chile's exports of textile and apparel to the
    United States are insignificant with a total customs value of $11
    million while Honduras' exports are significant and amount to $2,287.6
    billion.
        Comparing Chile's textile and apparel industry to Mexico
    demonstrates the need to model CAFTA on NAFTA, not Chile. Following
    Chile's model in textile and apparel is a path that could make Central
    America's industry uncompetitive after January 1, 2005 when the Multi-
    Fiber Arrangement expires and quotes are lifted. The export activity of
    the existing industry demonstrates the need for the USTR, in the CAFTA
    negotiations, to integrate Honduras and Central America with Mexico,
    Canada, CBI, and eventually the Andean regions. Only such integration
    of the textile and apparel industries in this hemisphere will allow the
    industry to remain competitive.

    II.  CBTPA/Honduras and Its Partnership with the U.S. Industry

        When reviewing the aforementioned facts, Congress and the
    Administration must understand that major portions of the U.S. textile
    and apparel industry are principal beneficiaries of CBTPA, and its
    enhancement in 2002. In the CAFTA negotiations, the trade policy
    concessions made by the United States to the Central American
    countries, including Honduras, will have major ramifications for the
    U.S. industry. While some companies, or associations, may view textile
    and apparel trade policy narrowly, the facts demonstrate that the
    expansion of textile and apparel trade in Central America has been
    beneficial both to the U.S. industry and the Central American industry
    and is critical to that industry's future competitiveness.
        A case in point where protectionism hurt the U.S. industry as much
    as the Central American industry is the dyeing and finishing
    prohibition that Congress and the Administration included in CBPTA
    enhancement. It takes approximately three weeks for knitting machines
    to be palletized, shipped to the region, and set up for operation.
    While some in Congress, and the industry, argued that preventing dying
    and finishing of U.S. fabrics in the CBI region benefited U.S. textile
    and apparel employees, we now know that was not true. In its December
    2, 2002 statement to Ambassador Zoellick, the American Yarn Spinners
    Association (AYSA) pointed out that the limitations on the ability to
    dye and finish U.S. fabrics hurt U.S. greige goods manufacturers. We
    now know a number of U.S. greige good knitters were put out of
    business. Perhaps some vertically integrated U.S. companies may have
    benefited, but many more, who did not have dying and finishing
    facilities were put out of business. Thus, a politically created
    artificial impediment hurt both the U.S. industry and Central American
    and CBI industries. We cannot have similar market dislocation
    provisions in CAFTA. Instead, CAFTA must correct these bad policy
    choices.
        Prior to the passage of the Trade Development Act of 2000, which
    included CBTPA and AGOA, U.S. yarn exports to the CBTPA countries were
    basically flat. The U.S. International Trade Commission (ITC) data
    demonstrates that as soon as CBTPA was passed, U.S. yarn exports to
    Honduras doubled in the period from 2001 to 2002. This was also true
    for U.S. yarn exports to all CBTPA countries. Thus after 5 years of
    controversy in Congress over including broad provisions, from the time
    of its passage in 2001 the amount of the U.S. cotton yarn exported to
    Central America, and the Caribbean doubled. As a result, after one
    year, the U.S. industry supported doubling the caps in 2002 and
    virtually eliminating them over the next two years. Only one year after
    implementation of the 2000 Act there was a need by the U.S. cotton yarn
    and other textile manufacturers for higher ``caps'' and more
    flexibility. In its written statement submitted to the ITC on October
    17, 2002, the American Yarn Spinners Association stated:

            L  ``The attached charts are based on data from the U.S.
            International Trade Commission. As you will note, the producers
            of yarn and knit fabrics in the U.S. dramatically increased
            their exports to the CBTPA countries last year. In an otherwise
            dismal year for the U.S. textile industry, the benefits offered
            by CBPTA have preserved a number of U.S. jobs and companies
            that otherwise would have been lost.''

        U.S. industry statistics for 2001 establish that 58% of all U.S.
    cotton yarns that are exported to the CBI region are exported to
    Honduras, 17% to Guatemala, 16% to El Salvador, 5% to the Dominican
    Republic and 4% to Costa Rica. Similarly, the statistics for exports of
    U.S. cotton yarn to the countries in both NAFTA and the CBI regions
    establish that 42% of U.S. cotton yarn is exported to Canada, 22% to
    Mexico, 21% to Honduras, 6% to El Salvador, 6% to Guatemala, 2% to the
    Dominican Republic, 1% to Costa Rica, and the remaining percentages to
    the other CBI countries.
        In addition to the extensive use of U.S. cotton yarns, the overall
    U.S. trade statistics highlight the strong partnership between
    Honduras' apparel industry, the CBI region, and the United States
    industry. An analysis of the amount of U.S. value added in apparel
    exports from the region to the United States demonstrates the tie. This
    is particularly important for the U.S. industry as we look to January
    1, 2005. 73.97% of Honduras' exports to the U.S. in SMEs contain some
    U.S. inputs; and 63.6% of all of Central America's exports and 68.07%
    of all the CBI region's exports similarly consist of U.S. inputs. On
    the other hand, the rest of the world's exports to the United States do
    not demonstrate the same use of U.S. inputs. For example, China's
    exports to the U.S. only contain 0.26% of U.S. inputs. In the year
    ending June 30, 2002, China exported $7.2 billion in textile and
    apparel to the U.S, but $7.16 billion of that did not contain U.S.
    content. In other words, the U.S. manufacturers do not benefit from
    China's production of textile and apparel but they do from Honduras'
    and the other countries in Central America, and the CBI region.
        Any negotiating strategy by the USTR in CAFTA that undermines
    competitiveness or fails to integrate the Central American, CBI and
    NAFTA regions, will not only hurt Honduras' textile and apparel
    industry post the Multi-Fiber Arrangement, but it will also seriously
    damage the viability of the U.S. industry.
        The other factor that Congress and the Administration must consider
    in looking at the textile and apparel industry in Honduras is the
    origins of the investment and ownership. An analysis of established
    companies in Honduras demonstrates that 40% of the investment is from
    the U.S. and 31% from Honduran nationals. Another 15% of the investment
    is from the Korean countries, 4% from Hong Kong, and 2% from the
    Taiwanese. There is another 8% of foreign direct investment in the
    Honduras textile and apparel and sector spread among a variety of
    countries.

    III.  Factors that will allow Honduras to compete after January 1, 2005

        It is Honduras' belief that it has a number of competitive
    advantages, one of which is its strategic partnership with the U.S.
    yarn, textile and apparel industry. In addition, Honduras has a key
    geo-strategic location, with excellent port facilities only two or
    three days away from parts of the Gulf Coast, Miami, New Orleans, and
    Galveston. Honduras is only a two hour flight from Miami and Houston.
    This results in a competitive turnaround time and ease of doing
    business for U.S. companies.
        Honduras also has excellent relationships with the U.S. and other
    countries, and is politically and socially stable. President Maduro is
    the 7th consecutive President of Honduras to be elected democratically.
    Honduras has a skilled labor force and strong relationships between the
    business and labor sector. Coupling these attributes with Honduras'
    export incentives and free zones leads us to believe that Honduras can
    continue to be competitive
        While there may be U.S. protectionist pressures, such as those
    affecting CBTPA's implementation, in the negotiation and ratification
    of CAFTA, history demonstrates that allowing these pressures to control
    the process is bad policy and bad business for Honduras, the U.S., and
    the region. CAFTA must be a clear, simple, and flexible mutually
    beneficial commercial agreement if the United States and the region are
    to remain competitive after January 1, 2005 in the textile and apparel
    sector.

    IV.  CAFTA Negotiation

        The hearings before the ITC on January 22nd demonstrated both the
    potential pitfalls and the opportunities that must be balanced in CAFTA
    if the Central American countries, including Honduras, and the U.S.
    textile and apparel industries are to remain competitive in the post
    Multi-Fiber Arrangement world. On behalf of Honduras, and its textile
    and apparel sector, I would like to highlight a number of positions
    which we believe the Administration and the Congress should support in
    CAFTA:

         LCAFTA must integrate the textile and apparel industry in
    this hemisphere and create a seamless hemispheric industry.
         LCongress needs to understand the detrimental impact to
    U.S. and the region's trade that the faulty post-CBTPA implementation
    caused. This was the result of the protectionist efforts to restrict
    textile and apparel growth in the region. The U.S. industry has
    benefited greatly from both CBTPA and enhanced CBTPA. Protectionist
    efforts, when combined with a protectionist bureaucracy, resulted in
    financial harm to Honduras, the United States, and the region. CAFTA
    must be implemented in a business friendly, pro-trade manner. If not,
    U.S. government policies will be, at least partially, responsible for a
    loss of competitiveness post-January 1, 2005 in Honduras, Central
    America, and the United States.
         LThere must be an integrated customs compliance procedure
    and security program. While security programs like the Container
    Security Initiative (CSI) will provide expedited clearance for goods
    from Asia and Europe, it presently is not expected to include those
    goods coming from the CBI region. This could have a very detrimental
    impact on our industries post January 1, 2005.
         LIn order to be competitive, CAFTA must provide for dying,
    finishing, and printing of both U.S. and regional fabrics in the
    region.
         LWovens should also be allowed preferential access as well
    as knits. Regional fabrics should be allowed free movement in the
    region and enjoy preferential access to the U.S. market.
         LProvisions, such as the short supply provision, need to
    be clear and based on commercial reasonable criteria. Artificial
    impediments interfere with the partnerships which are evolving and
    create uncertainties over what are qualifying products. This forces
    sourcing decisions to other countries' preference programs which either
    have more flexible origin rules or to Asia where the products are price
    competitive, even after the payment of duties and tariffs.
         LThe rules of origin must be flexible enough to allow the
    use of fabrics produced in NAFTA, CBI, Central America, or Andean
    countries. The rules of origin should also include provisions through
    the use of different mechanisms such as TPL's, required percentages of
    regional and U.S. fabric, or inputs (accumulation); or other similar
    mechanisms so that the textile and apparel industry in the United
    States, Honduras and Central America can use cost competitive fabrics.
    This will allow the region's industry to grow and be competitive in
    world markets. The rules must also be clear, transparent and
    unambiguous. They also must be commercially reasonable.

    V.  Conclusion

        Honduras thanks the Ways and Means Committee for the opportunity to
    provide this written testimony. Honduras and its industry looks forward
    to the negotiation and ratification of a CAFTA that will be
    commercially reasonable and advance the integration of the hemisphere
    by integrating the textile and apparel industry of the NAFTA countries
    with the Central American and CBI countries. We ask the Administration
    and the Congress to support a commercially reasonable CAFTA in the
    textile and apparel industry that is negotiated, approved, and
    implemented by the end of 2003, or early in 2004.
                Sincerely,
                                                     Mario M. Canahuati
            Ambassador of the Republic of Honduras to the United States

                        [BY PERMISSION OF THE CHAIRMAN]

      Statement of the Embassy of the Government of the Dominican Republic
        We would like to take this opportunity to congratulate the
    Administration on the innovative strategy taken by the USTR with the
    simultaneous pursuit of bilateral, regional as well as multilateral
    negotiations. It is a way of generating pressure on other countries to
    cooperate on the process of market liberalization. That is why we
    believe that the U.S. should remain open to bilateral trade
    arrangements with countries such as the Dominican Republic (D.R.) that
    are important to the U.S. in terms of trade and security and that are
    ready and willing to negotiate.
        The Dominican Republic has been the success story of the Caribbean
    Basin Initiative (CBI); with the best economic performance and the
    strongest tradition of democracy. This country is the fifth trading
    partner of United States in Latin America and the Caribbean, and trade
    with the D.R. is bigger than trade with Russia.
        The exclusion of the Dominican Republic in the bilateral free trade
    agreement, initiated between the United States and Central America at
    the beginning of 2002, created a high level of anxiety in the Dominican
    economy. This exclusion places the Dominican Republic in a disadvantage
    vis a vis Central America. As a result companies installed in the DR
    are currently moving their operations to Central America and new
    investments are being diverted. There are no reasons why the leader of
    the CBI should have been excluded from these negotiations.
        Negotiating a free trade agreement between the D.R. and the U.S.
    will reinforce cooperation in non-trade sectors, specifically in the
    areas of common security interest. The U.S. and the D.R. have, and will
    continue to, closely cooperate on the war against terrorism, drug
    control and migration policy. Also it is to be considered that the
    Dominican population in the United States and Puerto Rico is calculated
    to approximately 1.4 million, 62% of which are U.S. citizens. It is
    also important to note that, the uncertainty created by the current
    situation directly affects both sides of the island of Hispaniola.
    Without a strong economy and a stable political situation in the
    Dominican Republic it will be more difficult to find a solution for the
    Haitian problem.
        In the case of the Dominican Republic, different alternatives have
    been examined. One of them is a bilateral agreement in which
    negotiations would be treated as a different undertaking as the Central
    American negotiations. Under this alternative, the negotiations should
    take place in tandem with the Central America in order to conserve
    resources; one might view them as a negotiation under the same roof in
    different rooms. The Dominican Republic is aware that there are other
    formulations that could achieve the same objective and we are willing
    to consider them and to discuss them with the USTR.
        The current U.S. position towards a U.S.-D.R. free trade agreement
    (FTA) is still static, since the declaration given by Amb. Robert
    Zoellick, on October 29, 2002, that ``the Dominican Republic is in the
    short list for a bilateral FTA with the U.S.'' The U.S. has not yet
    agreed on, or declared its intention to begin negotiations with the
    D.R. The objective of the Dominican Republic is to begin negotiations
    of a U.S.-D.R. free trade agreement no later than July 1st, 2003, and
    to conclude the negotiations simultaneously with the Central Americans.
        Our country has demonstrated that it is better prepared than any
    other country to start negotiating a bilateral with the U.S.A. We are
    only looking for equal treatment so we may compete with Central America
    on the same terms and therefore protect the interests of both American
    and D.R. investors and workers.

     Statement of the Honorable Eni F.H. Faleomavaega, a Representative in
                          Congress from American Samoa

        Mr. Chairman:

        I want to commend you for holding a hearing on the President's
    trade agenda which includes implementation of the Free Trade Agreements
    with Chile and Singapore, proposed Free Trade Agreements with Morocco,
    the Central American countries, Australia, the Southern African Customs
    Union, and the Free Trade Area of the Americas.
        As Ranking Member of the House International Relations Subcommittee
    on Asia and the Pacific, I want to say from the outset that I support
    U.S. efforts to promote international trade. However, I also want to
    say that I believe trade agreements should be based on principles of
    fairness. First and foremost, I believe we should be fair to American
    workers. I also believe we should be mindful of workers' rights at home
    and abroad.
        In no way do I believe we should support trade agreements that
    displace one set of workers for another simply because corporate
    America is looking for cheaper labor costs. I mention this because last
    year my district faced one of its most critical hours as a result of
    aggressive efforts by the H.J. Heinz Co., and its then subsidiary
    StarKist Seafoods, to include canned tuna in the Andean Trade
    Preference Act (ATPA). Although StarKist was very aware that duty-free
    treatment for canned tuna from Ecuador and other Andean countries would
    bring about massive unemployment and insurmountable financial problems
    in American Samoa, many of my colleagues were unaware that more than
    85% of American Samoa's economy is either directly, or indirectly,
    dependent on the U.S. tuna fishing and processing industries.
        At the time of the debate, many of my colleagues were also unaware
    that the largest tuna cannery in the world is located in American
    Samoa, and it is owned and operated by StarKist. For more than 40
    years, Samoan workers have helped StarKist to become the number one
    brand of tuna in the world. However, after more than a 40 year
    relationship with StarKist, cannery workers in American Samoa continue
    to be paid well below U.S. minimum wage standards. Samoan workers are
    paid at $3.60 and less per hour. StarKist workers in the Andean
    countries are paid $0.60 and less per hour. Given this disparity in
    wage rates, I do not believe now and I did not believe then that
    StarKist's interest in the ATPA was to curb drug production in the
    Andean countries. On the other hand, I believe StarKist fought the
    matter for one reason and one reason only--to displace $3.60 per hour
    workers for $0.60 per hour workers.
        I do not believe this is what free trade should be about and I am
    pleased that my colleagues agreed with me on this point and excluded
    canned tuna from the ATPA. Mr. Chairman, I thank you and Congressman
    Rangel for your support and leadership on this issue. Parenthetically,
    I would also like to note that StarKist has since changed ownership and
    I am hopeful that our new corporate partner, Del Monte Foods, will be
    more considerate of American Samoa's needs and more appreciative of our
    contributions.
        With this said, I want to speak specifically about the U.S. Central
    Free Trade Agreement that is now before us. I raise this as an issue
    because the United States does more than $200 billion in trade with
    Latin America. I won't go into a country by country analysis but I will
    say that if the U.S. wanted to export canned tuna or textiles to
    Central America we would have to pay a duty, or tariff rate, of some
    20% or more. In my book, this is not fair trade. This is not fair for
    textile workers in North Carolina or cannery workers in American Samoa.
        Furthermore, I continue to have serious concerns about how the
    International Trade Commission (ITC) conducts its investigations
    regarding the probable economic effects that the U.S. Central America
    Free Trade Agreement may have on the U.S. tuna and fishing processing
    industries. Once again, the ITC is bypassing a section 332
    investigation and providing Members of Congress with a piecemeal
    assessment of the effects this trade agreement may have on the U.S.
    tuna industry. As I have repeatedly stated, American Samoa's economy is
    more than 85% dependent, either directly or indirectly, on the U.S.
    tuna fishing and processing industries. A decrease in production or
    departure of one or both of our canneries could devastate our local
    economy resulting in massive layoffs and insurmountable financial
    difficulties.
        Simply put, anytime there is an attempt to include canned tuna in a
    free trade agreement, American Samoa is at risk. As such, I believe
    American Samoa's views should be considered and taken seriously by the
    ITC. Unfortunately, the ITC continues to dismiss American Samoa's
    concerns and has once more submitted a report to this Committee without
    soliciting information from the American Samoa Government (ASG). The
    ITC informed my office that its failure to solicit information from ASG
    was an oversight. Given that the ITC is very aware of my office and its
    involvement during the ATPA debate, I find it inexcusable that the ITC
    failed to reMember that American Samoa is a critical player in any
    discussion involving the probable economic effects that any trade
    agreement may have on the U.S. tuna and fishing processing industries.
        Mr. Chairman, as these discussions move forward and as the issue of
    canned tuna is considered in the context of any trade agreement that
    comes before this Committee, I am hopeful that you will once again be
    an advocate for American Samoa. I am also hopeful that the rights of
    workers at home and abroad will be protected as the U.S. moves to
    promote its trade agenda at this difficult time in our nation's
    history.

                                                  Florida Citrus Mutual
                                                Lakeland, Florida 33802
                                                         March 12, 2003
    U.S. House of Representatives
    Committee on Ways and Means
    Washington, DC 20515

        INTRODUCTION AND SUMMARY OF POSITION

        This submission is filed on behalf of Florida Citrus Mutual (FCM)
    of Lakeland, Florida, in response to the invitation for comments on the
    President's Trade Agenda in the Ways & Means Committee's Advisory of
    February 14, 2003, and following the testimony of the United States
    Trade Representative before the Committee on February 26, 2003. FCM is
    a voluntary cooperative association whose active membership consists of
    11,676 Florida growers of citrus for processing and fresh consumption.
    FCM represents more than 90 percent of Florida's citrus growers. FCM's
    membership also accounts for as much as 80 percent of all oranges grown
    in the United States for processing into juice and other citrus
    products.
        The President's Trade Agenda is of singular concern to Florida
    orange growers, one of the largest unsubsidized agricultural industries
    in America. Growers and the many support industries in Florida listen
    carefully to every detail of the Administration's agenda, since the
    maintenance of the current U.S. tariff on orange juice from Brazil is
    absolutely essential to the survival of the second largest industry in
    Florida. It is not an exaggeration to say that many growers look to the
    Administration's WTO and FTAA market access proposals as the
    pronouncements on whether their groves will pass on to the next
    generation in their families. Florida citrus growers will continue to
    work with Congress and the Administration to make it clear that this
    industry is truly unique in the context of traditional economic theory,
    and any reduction in the current tariff will be both economically
    damaging and anti-competitive.
        The U.S. orange juice tariff offers the most efficient Florida
    orange growers the opportunity to exist as the sole large volume
    competitor in a global industry dominated by five huge producers in
    Brazil. The tariff does not ensure survival, as many bankrupt Florida
    growers can attest, but it counteracts some of the extreme pricing
    pressure inflicted by frequent devaluations of Brazil's currency, the
    predatory pricing behavior of the Brazilian orange juice oligopoly, and
    the sheer market power of a highly concentrated industry selling
    globally a dollar denominated commodity made with progressively
    devalued local inputs. Furthermore, the tariff gives Florida growers a
    fighting chance to make a living in a country that properly places
    tremendous value on costly worker rights and environmental integrity,
    in the face of competition from a country that does not.
        The global orange juice industry is highly unique. World orange
    juice consumption is concentrated chiefly among only 2 regions: the
    United States and the European Union. Aside from the United States and,
    to a lesser extent, Canada,\1\ there are no other significant orange
    juice consuming countries in the Western Hemisphere. Thus, the U.S.
    orange juice industry is not in a position to benefit from FTAA trade
    liberalization.
    ---------------------------------------------------------------------------
        \1\ The United States already enjoys dutyfree access to the
    Canadian orange juice market.
    ---------------------------------------------------------------------------
        Global orange juice production is also concentrated chiefly among
    only 2 countries: Brazil and the United States. Brazil's production is
    controlled by 5 very large processors,\2\ which control roughly 80
    percent of Brazil's FCOJ production. Given that they also operate and
    control Brazil's tank ship distribution system, these companies
    indirectly control nearly all of Brazil's FCOJ exports. The large
    Brazilian processors benefit from advantages brought by past
    subsidization and dumping, lax environmental protection, weak and
    largely unenforced labor laws, frequent national currency devaluation
    (which reduces the relative cost of production inputs and provides
    false incentives to overproduce), and oligopoly price manipulation.
    ---------------------------------------------------------------------------
        \2\ These dominant Brazilian processors are Cargill Citrus Ltda.,
    Citrosuco Paulista S.A., Citrovita Agro Industrial Ltda., LouisDreyfus
    Citrus S.A., and Sucocitrico Cutrale Ltda.
    ---------------------------------------------------------------------------
        Florida orange growers are not the only U.S. agricultural industry
    pitted against the unfair advantages of Brazil's agricultural exports;
    however, they are one of the few industries that the U.S. FTAA proposal
    threatens with demise. U.S. soybean farmers claim that on account of
    Brazil's currency devaluation, they were receiving 40 percent less for
    their soybeans in 2002 than in 1997, while Brazilian farmers were
    receiving over 36 percent more.\3\ Brazil is the world's second largest
    soybean producer after the United States, so this is very significant.
    However, soybeans are consumed throughout world and new export markets
    are highly sought after by the U.S. industry. So, it makes sense that
    the U.S. soybean industry contends with the unfair advantages of
    Brazil's devaluation chiefly via domestic subsidies. While subsidies
    are used to help level the playing field for agricultural industries
    whose top markets are abroad, tariffs are used to level the field for
    industries, like orange juice, whose top markets are in the United
    States. The U.S. industry that grows oranges for processing is unique
    among U.S. agricultural industries in that it does not receive any
    production or trade distorting (WTO-designated ``amber box'') domestic
    subsidies. Its only offsetting tools are the tariff and enforcement of
    the unfair trade laws.
    ---------------------------------------------------------------------------
        \3\ ``ASA Emphasizes Importance of Maintaining $5.26 Soybean Loan
    Rate to Help Offset Effects of Currency Devaluations in Argentina &
    Brazil,'' American Soybean Association, January 7, 2002 (http://
    www.soygrowers.com/newsroom/releases/2002%20releases/r010702.htm).
    ---------------------------------------------------------------------------
        FCM believes that the Administration's FTAA proposal on agriculture
    is lop-sided to the extent that it puts all U.S. agricultural tariffs
    on the table, while leaving all domestic subsidies off the table. In so
    doing, the Administration's proposal effectively, if unwittingly,
    singles out agricultural industries for demise based exclusively on the
    location of their markets, without consideration of the effect on the
    U.S. economy. Not only is an unsound approach to the policy of trade
    negotiations, it is also guaranteed not to meet any of the stated
    objectives of trade liberalization: foreign industrial growth, lower
    prices to consumers, and increasing living standards.
        FCM asserts that any reduction in the U.S. orange juice tariff
    applying to Brazil would devastate the U.S. industry that grows oranges
    for processing. Furthermore, any tariff reduction would critically
    damage the entire Florida citrus industry, the economic impact of which
    has recently been estimated at $9.13 billion in industry output, $4.18
    billion in value-added activity, and 89,700 jobs.\4\ Perhaps even most
    damaging to the U.S. economy is the fact that, since this Florida
    industry is Brazil's only competitor of global significance, its demise
    would not bring cheaper orange juice to the U.S. breakfast table, but
    would eventually unleash the Brazilian oligopoly to raise U.S. orange
    juice prices. For all of these reasons, FCM strongly opposes any
    reduction in U.S. orange juice tariffs under the FTAA or any trade
    agreement to which Brazil is a party.
    ---------------------------------------------------------------------------
        \4\ Alan Hodges, et al., ``Economic Impact of Florida's Citrus
    Industry, 1999-2000,'' Economic Information Report, EIR 01-2,
    University of Florida, Institute of Food and Agricultural Sciences,
    Food and Resource Economics Department, July 2001, p. 3.

    ---------------------------------------------------------------------------
    CONCENTRATION OF GLOBAL PRODUCTION AND CONSUMPTION

        The polarization of global orange juice consumption in the United
    States and the EU, and the polarization of production in Brazil and the
    United States are unique and defining characteristics of this industry
    (see charts below). Because these factors are strong determinants of
    the negative outcome of trade liberalization, it is imperative that
    they be understood by all U.S. agricultural trade negotiators.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: FAO.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: ``Situation and Outlook for Citrus'' and ``Situation and
        Outlook for Orange Juice,'' Horticultural & Tropical Products
        Division, FAS, August 1, 2002.

    LBRAZIL'S CONTROL AND MANIPULATION OF THE GLOBAL ORANGE JUICE MARKET

        The concentration of production among these 5 large Brazilian
    orange juice processors has enabled them to place tremendous downward
    pressure on processing orange prices in Brazil. In addition, the
    Brazilian orange juice processors' oligopoly dominates and manipulates
    the global orange juice market. As seen in the charts below, the price
    of Brazilian frozen concentrated orange juice (FCOJ) in the United
    States and the commodity futures price of FCOJ (which is considered one
    of the most accurate indicators of the U.S. price of wholesale FCOJ)
    have declined in lock step during the past decade, in tandem with the
    expansion and concentration of Brazil's orange juice industry.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Compiled by Barnes, Richardson & Colburn with futures prices
        from the NY Board of Trade; and Brazilian FCOJ export prices from
        CACEX, DECEX, FAS.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: U.S. Agricultural Trade Office, FAS, USDA, Sao Paulo.

        Not only does the Brazilian orange juice oligopoly control prices
    on an annual basis, but they appear to be attempting to manipulate
    world orange juice prices on a seasonal basis in order to maximize
    orange juice prices during their peak harvesting season (June through
    September) by continually underestimating the size of their orange crop
    and juice production. For nine straight seasons from 1991/92 to 2000/
    01, initial Brazilian estimates of FCOJ production, which are made at
    the beginning of Brazil's peak orange harvesting season,\5\ have
    understated actual output by 4-27 percent (see chart below).
    ---------------------------------------------------------------------------
        \5\ The U.S. agricultural attache in Sao Paulo reports these
    estimates during June of each year in ``Brazil Citrus Annual,'' GAIN
    Report, Foreign Agricultural Service, USDA.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Compiled by Florida Citrus Mutual from estimates reported in
    ---------------------------------------------------------------------------
        ``Brazil Citrus Annual,'' GAIN Report, FAS, USDA.

        Then towards the end of the Brazilian harvest (in November and
    December) when the market finally learns that Brazil has harvested many
    more oranges than was previously estimated, the market price falls to a
    new equilibrium just in time for the peak Florida orange harvesting
    season (December through April). Although market analysts and futures
    traders are increasingly becoming aware of this deception and are
    beginning to factor it into their decision-making, the fact that it has
    occurred speaks loudly of the powerful market control and predatory
    capabilities of the Brazilian oligopoly.
        Brazil is the world's largest producer of oranges by a substantial
    margin; while the United States is the largest orange juice consuming
    country in the world. The United States is also Brazil's only truly
    global competitor. Brazil has enormous incentive, as well as potential,
    to cripple the U.S. industry so that it can dominate the U.S. orange
    juice market. For the same reasons we enforce antitrust laws in this
    country, we must uphold the U.S. tariff on orange juice from Brazil.
    ``Free'' trade in orange juice will not lead to greater competition,
    consumer benefits, or overall global industry growth as might occur in
    other agricultural industries whose production is more widely
    distributed. It will lead to the rapid demise of Brazil's only
    remaining global competitor--Florida--and Brazil's realization of an
    airtight global monopoly on orange juice.
        Brazilian industry has already been found by the United States to
    have engaged in both injurious sales at less than fair value prices
    (including less than cost of production), and injurious sale of
    subsidized juice. As a result of an affirmative Sunset Review
    determination in 1999, an antidumping order remains in effect on frozen
    concentrated orange juice from Brazil, and the applicable dumping
    margins for the suppliers still covered by the order are significant.
        U.S. orange juice markets, particularly those throughout the EU,
    have also been increasingly plagued with Brazilian orange juice prices
    that appear to be well below their cost of production. During September
    2000 through April 2001, the price of bulk Brazilian FCOJ in the EU was
    often less than $700 per metric ton (including ocean freight). In
    Spring 2001, in his appeal to the European Commission for protection,
    the President of the Italian Consortium of Citrus Processors (CITRAG)
    stated,

            LWe believe that these [Brazilian] prices, which include
            freight cost from Santos to Europe, and for some deals also
            include the cost of drums, closely resemble `dumping', since
            the production and overhead costs incurred by the Brazilian
            industry are certainly beyond these levels.\6\
    ---------------------------------------------------------------------------
        \6\ ``Italian Industry Slams Brazilian Processors,'' FOODNEWS, Agra
    Europe Ltd., Volume 29, No. 15, Apr. 6, 2001, p. 12.

        As seen in the chart above, the long-term annual average trend in
    the price of Brazilian orange juice exports has been downward during
    the past decade and a half. Such constant downward price pressure in
    foreign markets makes the exporting of U.S. orange juice nearly
    impossible. Current levels of U.S. orange juice exports are more a
    function of the export incentives provided by the import duty drawback
    program, than of the ability of U.S. producers to earn a fair price in
    export markets. Even if there existed lucrative orange juice markets in
    the Western Hemisphere outside of U.S. and Canadian borders, and even
    if orange juice tariffs were liberalized in these markets, the U.S.
    orange juice industry would stand little chance of competing with
    Brazil at these extremely low price levels.

                         BRAZIL'S UNNATURAL ADVANTAGES

        Florida orange growers understand the virtues of free trade and the
    importance of negotiating trade agreements that are sensitive to the
    interests of developing countries with infant and emerging industries.
    However, Brazil's orange juice industry is one of the most advanced
    agricultural industries in the world. According to the Brazilian
    Association of Citrus Exporters (ABECITRUS), ``[the orange juice
    industry] is one of the main sectors of Brazilian agribusiness,
    employing the latest in technology, with the best logistics and
    transport system available in the world today.''\7\ The Brazilian
    oligopoly owns an entire fleet of tanker ships, which haul over 80
    percent of the orange juice offered on the world market, generating for
    Brazil approximately $1.5 billion in U.S. currency each year. These are
    not the marks of a ``developing industry,'' but a highly
    industrialized, state-of-the-art industry that resides in a developing
    country where it can exploit the underdeveloped economic, political,
    and social conditions that persist there.
    ---------------------------------------------------------------------------
        \7\ Http://www.abecitrus.com.br/abecus.html.
    ---------------------------------------------------------------------------
        It is a well-documented fact that the Brazilian citrus industry is
    not subject to enforcement of the same child labor laws and other labor
    standards that are enforced in the United States. In its 1998 report to
    Congress,\8\ the U.S. Department of Labor reported,
    ---------------------------------------------------------------------------
        \8\ By the Sweat & Toil of Children, Volume V: Efforts to Eliminate
    Child Labor, U.S. Department of Labor, 1998 (http://www.dol.gov/dol/
    ilab/public/media/reports/iclp/sweat5/).

            LThe harvesting of oranges also presents its own unique
            dangers. According to Brazilian welfare groups and unions,
            close to 150,000 children are employed during the country's
            six-month orange harvesting season. They pick oranges in severe
            heat for as long as 12 hours a day. The children's hands are
            dyed green and their fingertips are sometimes eroded by citric
            acid from the oranges and toxic pesticides sprayed even while
            children are in the orange groves. In some cases, damage to
            their fingertips is so severe that children are later refused
    ---------------------------------------------------------------------------
            identification cards due to a lack of fingerprints.[FN]

        The U.S. Department of State reports in its 1999 Country Report on
    Human Rights Practices in Brazil: \9\
    ---------------------------------------------------------------------------
        \9\ Released by the Bureau of Democracy, Human Rights, and Labor,
    U.S. Department of State, February 25, 2000.

            LA report published by the Sergipe state government in 1997
            stated that 10,000 children and adolescents between the ages of
            6 and 18 were part of the labor force in the orange-growing
    ---------------------------------------------------------------------------
            region, with 54 percent between the ages of 7 and 14.

        Without competition-equalizing tariffs, U.S. orange growers cannot
    and should not be made to compete with such an exploitative foreign
    industry.
        Brazil ratified International Labor Organization (ILO) Convention
    No. 138 on the Minimum Age for Employment on June 28, 2001, and ILO
    Convention No. 182 on the Worst Forms of Child Labor on February 2,
    2000. In addition, Brazil's Ministry of Welfare and Social Assistance
    (MPAS) has listed the harvesting of oranges among the ``worst forms of
    child labor'' in Brazil.\10\ However, as of March 2003, legislation
    that would fully implement these Conventions has still not been made
    law in Brazil.
    ---------------------------------------------------------------------------
        \10\ U.S. Embassy-Brazil, unclassified telegram no. 001439,
    September 18, 2000. Reported by the U.S. Department of Labor at http://
    www.dol.gov/ILAB/media/reports/iclp/Advancing1/html/brazil.htm.
    ---------------------------------------------------------------------------
        There are a few rather weak anti-child labor laws on the books in
    Brazil. For instance, under the Brazilian Federal Constitution,
    employing children under the age of eighteen to work at night or in
    ``any dangerous or unhealthy job,'' and employing children under
    sixteen, unless they are apprentices, is punishable by a $320 fine.\11\
    However, the practice of child labor remains rampant in Brazil's citrus
    industry, either because the fines are too low to be a deterrent or the
    laws are simply not being enforced. Even if Brazil eventually
    strengthens its anti-child labor laws, lack of enforcement will render
    the laws powerless.
    ---------------------------------------------------------------------------
        \11\ ``Child Labor Law Changes in Brazil,'' Global March Against
    Child Labor, Jan. 25, 1999, http://www.globalmarch.org/cl-around-the-
    world/child-labor-law-changes-in-brazil.html.
    ---------------------------------------------------------------------------
        In discussing the FTAA, Representative Zoellick testified at the
    hearing on President Bush's Trade Agenda that the hemisphere's heads of
    state agreed at the Third Summit of the Americas to ``promote
    compliance with internationally recognized core labor standards.''\12\
    The Inter-American Conference of Ministers of Labor (IACML), which was
    set up to implement the labor-related mandates of that Summit, produced
    the ``Declaration and Plan of Action of Ottawa'' during their most
    recent meeting in October 2001. This Declaration says, ``We will work
    to bring all national laws, regulations and policies into conformity
    with this convention [No. 182] and will take immediate action to
    eliminate the worst forms of child labor.\13\
    ---------------------------------------------------------------------------
        \12\ Statement of the Honorable Robert B. Zoellick, United States
    Trade Representative, Testimony Before the Full Committee of the House
    Committee on Ways and Means, Feb. 26, 2003.
        \13\ ``Declaration and Plan of Action of Ottawa,'' XII Inter-
    American Conference of Ministers of Labor, OEA/Ser.L/XII.12.1, COTPAL/
    doc.3/01, Oct. 19, 2001.
    ---------------------------------------------------------------------------
        In addition, the U.S. Department of Labor's International Child
    Labor Program has contributed $112 million, since 1995, towards the
    International Labor Organization's International Program on the
    Elimination of Child Labor.\14\ Rewarding Brazil's exploitative orange
    juice industry with a reduction in U.S. orange juice tariffs would not
    only contradict a decade of effort by the U.S. Department of Labor, it
    would contradict the current Administration's own trade agenda, while
    punishing U.S. orange growers who obey the stringent labor laws of the
    United States.
    ---------------------------------------------------------------------------
        \14\ http://www.dol.gov/ILAB/programs/iclp/about--iclp.htm.
    ---------------------------------------------------------------------------
        The Florida Division of Agriculture and Consumer Services (as
    required by the U.S. Department of Labor) conducted 2,700 Worker
    Protection Standard (WPS) inspections in the State of Florida during
    2000. Approximately half of these inspections were to ensure the
    protection of workers in citrus groves.\15\ The labor standards in
    Florida orange groves are high and heavily regulated by State and
    Federal agencies. Minimum age and wage regulations are rigorously
    enforced. Field workers and harvesters are subject to a schedule of
    routine training to ensure safe operation of mowing, pruning and
    harvesting equipment. They are also trained to ensure safe use and
    mixing of field chemicals such as pesticides and fungicides, etc. They
    are required to wear appropriate protective gear in the groves and to
    observe strict rules for re-entering the groves after chemical
    applications. Grove owners are also required to meet stringent housing
    standards for their field and harvesting workers who require housing,
    such as migrant workers from abroad employed under the H2A program. We
    are not aware of any such regulations being enforced in Sao Paulo,
    Sergipe or other citrus growing regions in Brazil.
    ---------------------------------------------------------------------------
        \15\ Estimate by economists at Florida Citrus Mutual.
    ---------------------------------------------------------------------------
        In addition, Florida orange growers are held liable for any
    degradation to the land, water or air that may result from their
    operations. They are required to use field chemicals in compliance with
    the environmental regulations and warnings on their labels. They are
    also responsible for protecting surrounding land and water from
    fertilizers and chemical run-off. Pursuant to the run-off regulations,
    many growers in South Florida must dedicate on average 20 percent of
    their acreage to retention ponds and ditches that prevent run-off and
    allow for the safe treatment of grove water. Brazil's environmental
    standards for citrus groves are considerably more lax, if existent at
    all.
        Florida orange growers are also prevented from using a number of
    generic-brand field chemicals that are readily available in Brazil. In
    the United States, the process of getting generic field chemicals
    registered is much more lengthy and expensive than in Brazil, because
    EPA has more stringent requirements and the chemicals must undergo more
    rigorous testing to ensure their safety than in Brazil. In Brazil, the
    average cost of registering a generic field chemical is about $45,000
    to $100,000. Whereas in the United States, such registration costs are
    in excess of $5,000,000. The end result is that U.S. grove owners are
    forced to use the more expensive brand name chemicals which have
    already been registered with EPA, while Brazilian grove owners are able
    to cut costs substantially by using generic chemicals that have not yet
    been proven safe in the United States.
        Lax, unenforced and nonexistent labor, environmental and health and
    safety laws are, however, not the only reason why Brazil is able to
    sell its orange juice at such low prices. Ronald Muraro and Thomas
    Spreen at The University of Florida recently calculated comparative
    cost of production estimates for processed oranges in Florida and Sao
    Paulo, Brazil. They estimate that in crop year 2000/01 labor costs
    (including wages, salaries and social taxes) were 45 cents/box in
    Florida and only 17 cents/box in Sao Paulo.\16\ A substantial portion
    of this wide discrepancy is due to the many currency devaluations
    Brazil has experienced during the last few decades.
    ---------------------------------------------------------------------------
        \16\ ``Cost for Processed Oranges: A Comparison of Florida and Sao
    Paulo,'' Ronald P. Muraro and Thomas H. Spreen, IFAS, The University of
    Florida, presented at the Florida Citrus Industry Economics Meeting,
    July 8-9, 2002.
    ---------------------------------------------------------------------------
        Brazil's orange juice export sales to all markets are denominated
    in U.S. dollars. When the Real is devalued, the cost of labor and other
    domestic production inputs, which are denominated in Real, become
    cheaper relative to the price paid for the orange juice. For instance,
    in marketing year 1996/97, the currency conversion was $1.04 Real = $1
    U.S. As of July 1, 2002, the conversion was $2.84 Real = $1 U.S.\17\
    Thus, a unit of labor that cost $1 Real or 96 cents U.S. in MY 1996/97,
    would only cost 35 cents U.S. on July 1, 2002. So the cost of grove
    labor as a percentage of the export price of Brazilian orange juice
    shrinks each time the Brazilian Real loses value against the U.S.
    dollar, thus, increasing the profit margin obtained by the Brazilian
    processor. The increase in profits then sends false market signals
    throughout the Brazilian citrus industry causing it to overplant and
    overproduce. The overproduction gives way to lowered international
    orange juice prices, which reduce the value of Florida's processing
    oranges and diminish growers' profits. However, further devaluation
    prevents the Brazilian industry from feeling the squeeze of lower
    international prices, and the cycle continues. This is just one more
    way the Brazilian orange juice oligopoly is able to benefit from
    residing in a country with an underdeveloped and inflationary economy.
    ---------------------------------------------------------------------------
        \17\ International Financial Statistics, International Monetary
    Fund.
    ---------------------------------------------------------------------------
        In an ideal free market world economy where basic and equivalent
    labor, environmental, and health/safety laws exist and are enforced,
    where world production and prices are not controlled by a single
    oligopolistic industry, and where currency devaluations do not tip the
    scales dramatically in favor of the foreign exporters, the law of
    natural advantages might outweigh arguments for tariff protection. But
    the Florida agriculture sector in general, and citrus in particular,
    cannot defer to that logic, because Brazil's advantages are not
    ``natural'' and the playing field is grossly skewed. The tariff is the
    only offset on which this unsubsidized U.S. industry can rely to
    counter these ``unnatural'' advantages.

                 NEGATIVE ECONOMIC EFFECTS OF TARIFF REDUCTION

        If U.S. orange juice tariffs are reduced or eliminated, the price
    of U.S. imports of bulk FCOJ from Brazil, as well as the futures
    contract prices of FCOJ and the U.S. wholesale price of orange juice,
    would fall rapidly. At the same time, the volume of U.S. FCOJ imports
    from Brazil would increase significantly. The supply of U.S. juice
    oranges and orange juice, however, would remain constant in the short
    term, as they are not responsive to price.
        It is important to understand that the U.S. supply of juice oranges
    is highly inelastic, because they are a natural, perishable product
    whose supplies are primarily dictated by the number of productive
    citrus trees in the United States, air temperature, amount of rainfall,
    and citrus tree diseases. Capacity utilization in citrus groves is
    always near 100 percent, because all wholesome citrus fruit is picked.
    Since it takes at least 4-5 years for an orange tree to begin bearing
    fruit and 25 years for it to stop bearing fruit, supplies cannot be
    manipulated in the short-run in response to price. Thus, given the
    inability of orange supplies to respond to juice prices, the U.S. on-
    tree price of juice oranges would immediately plummet and, in turn,
    cause grower rates of return to fall well below the break-even point,
    resulting in widespread grove closures.
        The grove closures would leave unemployed over 42,000 citrus grove
    workers in Florida alone, and jeopardize the existence of all U.S.
    juice extractors and processors that depend on domestic citrus. It
    would also have grave consequences for the following upstream suppliers
    of the U.S. juice orange industry:

         Lnurseries that supply replacement trees to citrus groves,
         Lsuppliers of fertilizer, fungicide, herbicide and
    insecticide to citrus groves,
         Lsuppliers of irrigation and spraying systems, mechanical
    harvesters and farm implements,
         Lfinancial institutions, especially merchant banks that
    have citrus exposure,
         Linsurance companies that serve the citrus industry, and
         Lfreight companies that haul citrus to processing plants.

        Since the land on which processing oranges are grown consists of
    very sandy soil with little agricultural value outside of citrus
    production, and the volume of all other fruit juices extracted in the
    United States combined pales in comparison to orange juice, the above
    upstream industries could not exist if orange juice production were no
    longer viable. In addition, because the production of about 75 percent
    of all processing oranges is concentrated in Central and South Florida,
    entire counties in these regions would be ravaged and their real estate
    values would tumble as thousands of groves would be abandoned, with no
    practical alternative land utilization.

     INCREASED SALES OF NOT-FROM-CONCENTRATE (NFC) JUICE IS NOT A SOLUTION

        Those wishing to reduce U.S. orange juice tariffs have suggested
    that U.S. orange growers should shift their production primarily to the
    fresh, pasteurized, Not From Concentrate (NFC) juice market, in which
    Brazil has not traditionally been a significant competitor, due to the
    costs of transport over extended distances. Unfortunately, this is not
    a viable solution.
        U.S. growers of oranges for processing do not determine the product
    into which their oranges are processed. The utilization of the oranges
    (whether in concentrate, fresh pasteurized juice, or for further
    processing of juice and non-juice beverages) is the sole decision of
    the Florida processors, some of which are owned and controlled by the
    large Brazilian processors. Growers simply harvest and sell all the
    fruit that their trees produce. Growers, therefore, subsist by means of
    the returns on the sale of juice made from deliveries of their fruit,
    no matter how utilized.
        If tariffs on orange juice from Brazil were reduced or eliminated,
    U.S. orange juice processors, reprocessors and blenders that already
    reprocess and blend varying amounts of Brazilian orange juice would
    likely purchase even larger volumes of Brazilian FCOJ because its price
    would be even lower compared to the cost of purchasing and processing
    U.S.-grown oranges. This would cause the price paid to U.S. growers for
    processing oranges to decline. The decreased price of Brazilian FCOJ
    may even cause U.S. processors to decide to produce less NFC orange
    juice, and more concentrated orange juice due to its lower cost,
    bringing the price of processing oranges grown in Florida down even
    further. Since U.S. growers cannot reduce their crop size in the short
    term (meaning less than a period of about 5 years) and can only reduce
    it marginally over the longer term on account of the long life span of
    orange trees, the impact of any tariff reduction on processing orange
    prices in Florida would be dramatic and immediate.
        If U.S. orange juice duties were reduced, it is possible that at
    least a few of the U.S. processors who currently process only U.S.
    oranges (i.e., cooperatives and U.S. grower-owned processors) would
    continue to do so and would process them exclusively for the NFC
    market. While this demand for U.S.-grown oranges for use in the NFC
    market might provide a limited amount of support for orange prices, it
    would never be enough to off-set the strong price-depressing influence
    of Brazilian FCOJ and, therefore, could not prevent widespread grove
    closures.
        The increasing level of foreign presence in the U.S. NFC market is
    yet another reason why the NFC market is not a viable solution for
    Florida orange growers. While foreign producers have not traditionally
    been competitive in the U.S. NFC market, a reduction in U.S. tariffs on
    Brazilian orange juice could cause Mexican and CBERA producers to enter
    this niche market in greater volume as it would likely be the only one
    in which they could compete against Brazil. The Del Oro orange juice
    processing company in Costa Rica and Belize already supplies NFC orange
    juice to the EU market via a joint venture between Del Oro and Dohler
    EuroCitrus.\18\ In addition, the presence of U.S. NFC in the EU market,
    as well as the presence of Brazilian NFC in the U.S. market indicate
    that transportation costs are not as prohibitive as had been
    assumed.\19\ Brazilian processors have now built tank ships designed to
    transport NFC in a more cost-efficient manner, and thus are expected to
    compete more directly with Florida processors in this product sector.
    ---------------------------------------------------------------------------
        \18\ CDC Group plc Report and Accounts 1999 at http://
    www.cdcgroup.com/publications/R&A1999.pdf.
        \19\ In 2002, U.S. exports of NFC to the EU (under subheading
    2009.12.0000) were over $6 million, and U.S. imports of NFC from Brazil
    (under subheading 2009.12.2500) were over $11 million.
    ---------------------------------------------------------------------------
        In short, both the FCOJ and NFC markets are necessary to assure
    economic operation of U.S. groves and sufficient volume of production.
    U.S. orange growers are currently operating at margins very close to or
    under their break-even point, and are simply too vulnerable to
    withstand the massive and immediate orange price decline that the
    onslaught of Brazilian FCOJ would cause should U.S. orange juice
    tariffs be reduced.

               EXPERIENCE UNDER NAFTA IS NOT A MODEL FOR AN FTAA

        Those wishing to reduce U.S. orange juice tariffs have also pointed
    to the experience of U.S. orange growers after Mexican orange juice was
    granted preferential tariff treatment under the NAFTA, implying that
    because NAFTA imports did not damage U.S. orange growers to the extent
    that many industry members had expected, a reduction in orange juice
    tariffs applying to Brazilian juice would be equally benign, or the
    same protections built into the NAFTA would be equally effective in an
    FTAA. These implications are completely misinformed.
        U.S. imports from Mexico have fallen short of expectations
    primarily due to damaging droughts in Mexico since the passage of
    NAFTA, as well as an outbreak of citrus tristeza virus (CTV) throughout
    most southeastern Mexican citrus groves. While the Mexican government
    has been working to eradicate this virus at both the state and federal
    levels, progress has been slow. These natural events have moderated
    what appeared, pre-NAFTA, to be a sharp escalation in Mexican orange
    production. Undoubtedly, the strong Mexican peso and heavy competition
    from Brazilian FCOJ, not to mention duty-free CBERA orange juice, in
    the U.S. market have also impeded Mexico's orange juice exports in
    recent years.\20\
    ---------------------------------------------------------------------------
        \20\ ``Mexico, Citrus: Mexican Government Hosts Citrus Forum,
    2001,'' GAIN Report, FAS, USDA, June 13, 2001.
    ---------------------------------------------------------------------------
        Despite the natural, currency and competitive difficulties Mexican
    producers have faced, U.S. imports of frozen orange juice from Mexico
    have still exceeded the NAFTA TRQ in every year, except 2001.\21\ Thus,
    Florida orange growers have still had to contend with significant
    competition from Mexico, which has contributed to the price pressure
    Florida growers are currently struggling with.
    ---------------------------------------------------------------------------
        \21\ ``Mexico Citrus Semi-Annual Report,'' GAIN Report, FAS, USDA,
    April 25, 2002.
    ---------------------------------------------------------------------------
        It is important to explain, however, that although the U.S. orange-
    growing industry has considered, and still considers, orange juice from
    Mexico to be a serious threat, the experience of Mexican orange juice
    imports into the United States resulting from NAFTA cannot be used as a
    model of the potential impact of Brazilian orange juice imports into
    the United States should U.S. tariffs on Brazilian juice be reduced or
    eliminated. In short, Mexico is not Brazil. Brazilian orange juice
    production dwarfs that of Mexico (see chart below). Brazil has more
    than twice as much land dedicated to orange production as Mexico and
    more than 3 times as many trees. Plus, unlike Mexico, Brazil has
    extremely low rates of fresh orange consumption. Therefore, Brazil
    processes 23 times as many oranges as Mexico.\22\
    ---------------------------------------------------------------------------
        \22\ Data in this and the previous sentence reflect Mexico's 2001/
    02 orange crop and Brazil's 2000/01 orange crop (from ``Mexico: Citrus
    Semi-Annual,'' GAIN Report, FAS, USDA, Apr. 25, 2002, and ``Brazil:
    Citrus Semi-Annual,'' GAIN Report, FAS, USDA, Nov. 20, 2001).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: World Horticultural Trade & U.S. Export Opportunities, FAS,
    ---------------------------------------------------------------------------
        USDA.

        The United States is currently Mexico's largest export market for
    orange juice. Mexico has the ability to divert fruit from fresh
    domestic consumption into orange juice processing for export to the
    United States; however, Mexico would not be able to shift very large
    quantities of orange juice from other foreign markets into the United
    States. This situation is quite different, however, in Brazil's case.
    In marketing year 2001/02, Brazil exported more than 7 times as much
    juice to foreign markets outside the United States as it exported to
    the United States.\23\ If U.S. FCOJ tariffs applying to Brazilian FCOJ
    were reduced or eliminated, Brazilian processors would have the ability
    to divert massive quantities of FCOJ from European markets into the
    United States on very short notice, potentially flooding the U.S.
    market and decimating U.S. grower prices overnight.
    ---------------------------------------------------------------------------
        \23\ ABECITRUS/SECEX at http://www.abecitrus.com.br/expyus.html.
    ---------------------------------------------------------------------------

                        ECONOMIC EFFECTS ON THE CONSUMER

        Aside from the impact of unrestrained orange juice imports on the
    U.S. orange growing industry, the most highly touted benefit of free
    trade agreements--lower prices to consumers--would not be realized in
    the case of orange juice. Increasingly, the price of retail orange
    juice has not tracked the declines in processing orange prices nor the
    declines in wholesale and futures prices of FCOJ. On the contrary,
    retail prices have skyrocketed while processing orange and FCOJ prices
    have collapsed.
        As can be seen in the charts below, processing orange prices have
    fallen dramatically during the past decade, causing grower profits to
    plunge to levels barely above the break-even point. Processing orange
    prices fell as a result of the declining wholesale price of FCOJ during
    the past decade (which is most accurately reflected in the futures
    price of FCOJ), and the wholesale price of FCOJ fell as a result of the
    falling price of Brazilian FCOJ.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: On-tree prices from Florida Agricultural Statistics Service
        (FASS) and futures prices from the New York Cotton Exchange (2000/
        01 figure is preliminary, based on Dec. through Mar. data).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Futures prices from the New York Cotton Exchange (2000/01
        figure is preliminary, based on Dec. through Mar. data); and import
        unit values from official statistics of the U.S. Department of
        Commerce (01/02 figure represents only Oct. through Jan.).

        At the retail level, however, U.S. orange juice prices no longer
    track the declining wholesale and grower prices, but have increased
    sharply in recent years (see chart below).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Futures prices from the New York Cotton Exchange (2000/01
        figure is preliminary, based on Dec. through Mar. data), and retail
        prices from A.C. Nielsen.

        The increase in retail prices cannot be explained away by the
    growth in U.S. NFC sales. The chart below demonstrates that retail
    prices of chilled reconstituted, frozen, and NFC orange juice have all
    increased substantially during recent years.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: A.C. Nielsen.

        What has happened is that orange juice retailers are charging the
    final consumer what the market will bear, which is apparently higher
    and higher each year, while the processors, reprocessors, and blenders,
    who buy their raw materials (FCOJ from Brazil or processing oranges
    from Florida growers) at plunging prices, all share in pocketing the
    significant juice mark-up. This pricing situation benefits the
    oligopolistic Brazilian processors two-fold because 1) they now own
    some of the processors in the United States that are benefiting from
    the mark-up, and 2) their low-priced FCOJ exports to the United States
    depress the prices received by U.S. growers thus forcing many of them
    out of business and expanding the Brazilian processors' control over
    world orange juice supplies and prices.
        Should U.S. tariffs on orange juice from Brazil be reduced or
    eliminated, this situation would be exacerbated, as the U.S.
    processors, reprocessors and blenders--the first consumers of imported
    orange juice--would reap the benefits of tariff reduction, while
    Florida growers of processing oranges would take a heavy hit. The final
    consumers of the imported orange juice would never see the price break
    supposedly derived from the tariff reduction. However, as the Brazilian
    processors amass greater and greater global market power, U.S. final
    consumers would eventually suffer the consequences of unrestrained
    orange juice prices.
        In order to get a glimpse of the likely impact of tariff reductions
    in the market, one need only look at the record of bulk juice prices,
    returns to growers, and prices to consumers over the past ten years. As
    the U.S. tariff decline of 15% was forced on the market under the
    Uruguay Round Agreements, the global bulk juice price and average
    return to Florida growers declined steadily over that time, while the
    price of the finished product to consumers rose, seemingly disconnected
    from those underlying factors. The reason is that a dramatically
    concentrated global industry with almost limitless cheap resources will
    take full advantage of any declining constraint on its power
    represented by tariff cuts, to minimize its competition and maximize
    its profits, at the expense of consumers.

                          THE U.S. ORANGE JUICE TARIFF

        For far too long, the U.S. tariff on orange juice has been unfairly
    criticized and targeted for reduction because it is considered a
    ``tariff peak.'' For this reason Florida Citrus Mutual now finds itself
    in the position of defending its tariff in the face of opposition from
    some U.S. agricultural sectors that have as their goal the reduction of
    overseas barriers to exports.
        It must be understood that the U.S. citrus tariff is the only form
    of assistance U.S. orange growers receive, and it costs U.S. taxpayers
    nothing. Furthermore, because most duties paid on U.S. orange juice
    imports from Brazil are subject to duty drawback, the Brazilian
    processors effectively pay only about $1.5 million, or 2.3 percent ad
    valorem, in orange juice duties.\24\ At the same time, non-citrus U.S.
    agriculture is now receiving over $20 billion annually in direct
    government payments.\25\
    ---------------------------------------------------------------------------
        \24\ Estimated by FCM based on the assumption that duties are drawn
    back on an amount of FCOJ imports from Brazil equal to 90 percent of
    U.S. FCOJ exports. In 2002, U.S. domestic exports of bulk FCOJ
    (2009.11.0060) were 441,664,083 liters. If we assume that 90 percent of
    these exports resulted in drawback, then import duties were drawn back
    on 397,497,675 liters of imports. In 2002, the import duty was
    7.85 cents/liter. Since 99 percent of import duties are drawn back, the
    amount of duties drawn back on 397,497,675 liters of imports would have
    been $30,891,532. In 2002, 411,577,471 liters (valued at $61,658,753)
    of bulk FCOJ were imported from Brazil, and $32,308,827 in duties were
    collected on these imports. So, post-drawback, U.S. Customs netted only
    about $1,417,295 ($32,308,827-$30,891,532) in duties on Brazilian bulk
    FCOJ during 2002. This means that the tariff really only cost U.S.
    importers .34 cents/liter ($1,417,295/411,577,471 liters), which equals
    only 2.3% ad valorem ($1,417,295/$61,658,753) in 2002.
        \25\ ``Farm Income and Costs, Direct Government Payments, ERS, USDA
    (http://www.ers.usda.gov/briefing/farmincome/data/
    GP--T7.htm).
    ---------------------------------------------------------------------------
        It is ironic that some U.S. agricultural advocates assert ``free
    trade'' principles and criticize the only form of ``assistance'' the
    orange growing industry gets, while standing on the wealth of these
    huge and growing farm subsidies. The most recent WTO notification that
    the United States made on domestic agricultural subsidies showed that,
    in marketing year 1998, the following U.S. commodities received
    production and/or trade-distorting ``amber box'' subsidies: barley,
    corn, cotton, dairy, canola, flaxseed, oats, peanuts, sorghum,
    soybeans, sugar and wheat; with citrus receiving nothing.\26\ The
    subsidies that non-citrus agricultural industries receive have ranged
    above 40 percent of their net farm income for several years (see chart
    below).
    ---------------------------------------------------------------------------
        \26\ ``Notification concerning domestic support commitments for
    marketing year 1998,'' received from the delegation of the United
    States on June 22, 2001, WTO Committee on Agriculture,
    G/AG/N/USA/36.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: ``Farm Income Forecast,'' ERS, USDA (http://www.ers.usda.gov/
    ---------------------------------------------------------------------------
        Data/FarmIncome/finfidmu.htm).

        FCM does not take issue with U.S. agriculture's receipt of
    subsidies. We know only too well the difficulties involved in competing
    against heavily subsidized EU commodities (i.e., Spanish clementines)
    and unfairly traded Brazilian commodities. However, we believe it is
    unfair to suggest that taxpayer-funded support payments are a more
    acceptable or less distortive means of government support than a non-
    taxpayer funded, pro-competitive tariff.
        It is by no means true that the United States has the highest
    agricultural tariffs in the hemisphere. According to the FTAA
    Hemispheric Database, the following figures represent the percentages
    of tariff lines in each country's tariff schedule that have duties
    equivalent to 10 percent ad valorem or above: \27\
    ---------------------------------------------------------------------------
        \27\ FTAA Hemispheric Database online at http://198.186.239.122/
    chooser.asp?Idioma=Ing.

    Brazil                                   68%
    Argentina                                67%
    Venezuela                                66%
    Colombia                                 63%
    United States                            11%

        Regarding ``tariff peaks,'' while the United States has 22 tariff
    lines equivalent to 35 percent ad valorem or above, Brazil has 57
    tariff lines in this range. Brazil has not yet put any of these tariff
    lines on the negotiating table.
        The U.S. tariff on orange juice must be understood as more than
    just a ``tariff peak.'' It is an ``agricultural offset,'' parallel in
    some ways to those that U.S. taxpayers fund directly for other farm
    commodities, but tailored for an industry whose chief market is in the
    United States. The beauty of this ``tariff program'' for orange juice
    is that it does not tap taxpayer dollars. It places a limited burden on
    the unfair or oligopolistic market players, Brazilian processors, which
    is where the burden belongs; and has a net positive impact on the
    federal budget.

                                   CONCLUSION

        The U.S. market is by far the most significant market we have.
    Unlike dairy and crop commodities, which are consumed throughout the
    world, orange juice is consumed primarily in the highly developed
    market economies of the United States and Europe. With Brazilian juice
    firmly entrenched in Europe at rock bottom prices, it only makes sense
    to concentrate on sales at home. Our growth in exports of specialty
    products, such as NFC, must necessarily be incremental and secondary to
    the domestic market for FCOJ. While the Florida industry will continue
    to seek out new export markets, both for fresh and processed products,
    it is myopic to think that we are likely to be as large a factor in
    foreign markets as Brazil. We simply do not have the domestic subsidies
    we would need to compete with the Brazilians and Europeans in Europe.
    Furthermore, we cannot be there to develop those new foreign markets
    slowly over the many years it will take them to achieve higher
    disposable incomes, if the Florida industry is forced out of existence
    by the elimination of the tariff. We want to serve the U.S. market and
    we can do so without the huge government payments that other
    agricultural sectors receive. However, the U.S. orange juice tariff is
    necessary to offset the unfair or artificial advantages that lower the
    price of Brazilian juice.
        Florida Citrus Mutual understands that free trade in many
    industries, including many agricultural industries, leads to increased
    competition, eventual price benefits to consumers, and overall global
    economic growth. Unfortunately, free trade cannot deliver these rewards
    to such a concentrated and polarized global industry, especially one in
    which the developing country's industry is, in fact, already the most
    highly developed in the world. Florida Citrus Mutual appreciates the
    opportunity to explain to the House Ways and Means Committee the unique
    global structure of the orange juice industry and the negative economic
    effects that would occur as a result of U.S. tariff reduction or
    elimination.
                Respectfully submitted,
                                                        Andy W. LaVigne
                                         Executive Vice President & CEO

                                                     Matthew T. McGrath
                                       Counsel to Florida Citrus Mutual

                        [BY PERMISSION OF THE CHAIRMAN]

                          Government of the Commonwealth of Puerto Rico
                                            San Juan, Puerto Rico 00936
                                                         March 12, 2003
    Congressman Bill Thomas
    Chair
    Committee on Ways and Means
    United States House of Representatives

    Dear Mr. Chairman:

        In response to your Committee's request for written comments on
    President Bush's trade agenda, we are enclosing herewith the following
    document with various points of particular interest to the Government
    of Puerto Rico as related to our economic characteristics, our relative
    position in the region and the Hemisphere as a result of free trade
    agreements such as the FTAA and CAFTA, and our comments with respect to
    some of the ongoing negotiations.
        The following document explains some of the features and
    characteristics of Puerto Rico's foreign trade, especially the type of
    linkages that exist between the Island's external sector and the
    overall economy. These linkages are then placed in the context of FTAA
    working committees and some aspects of the trade negotiations that are
    of particular importance to the Commonwealth of Puerto Rico's
    government and the private sector. Our subsequent comments focus on
    market access issues, intellectual property, investment, and services.
        Our Governor Sila Maria Calderon, and myself personally, take this
    opportunity to reaffirm our commitment to the FTAA process and to free
    and fair trade in the Americas.
                Sincerely,
                                                    Hon. Milton Segarra
       Secretary of the Department of Economic Development and Commerce
                                            Commonwealth of Puerto Rico

    PUERTO RICO AND THE FREE TRADE AREA OF THE AMERICAS: SOME GENERAL
    CONSIDERATIONS AND POLICY COMMENTARIES

        The systematic elimination of barriers to the movement of goods and
    services contemplated in the FTAA Agreement will effectively create the
    largest free trade area in the world, linking more than 500 million
    consumers from 34 different countries. The Commonwealth of Puerto Rico
    welcomes such openness and commercial liberalization. Like many other
    economies in the Caribbean, Puerto Rico has been an open market and
    active international trader for more than fifty years. The elimination
    of tariff and non-tariff barriers to trade in the Americas, as well as
    the harmonization of rules of conduct governing international
    commercial transactions in the region, will certainly create further
    opportunities for trade and investment in Puerto Rico and in the entire
    Caribbean region.
        Given our position as a Caribbean island that is also part of the
    United States customs territory, however, we believe it is important to
    note certain features of Puerto Rico's economy that differentiate us
    from other U.S. jurisdictions. We believe that such peculiarities
    should be taken into consideration in the overall position of the
    United States regarding the FTAA, so that we may perceive the benefits
    of freer trade while ensuring that any negative impact will have been
    contemplated in the negotiations stage.

    I. Puerto Rico's economy--general characteristics

        Puerto Rico is a relatively small, open, industrialized economy
    with a highly skilled labor force. Like many open economies, trade
    occupies a significant portion of economic activity, reaching an
    equivalent of 68% of GDP, and thus placing foreign trade at the top of
    the agenda of the Island's government. Puerto Rico's GDP of $67,897.1
    billion makes it one of the largest economies of the Caribbean region,
    although it is small in comparison with U.S. states of comparable
    population size.\1\ Exports totaled $46,900.8 billion, a figure that
    places the Island as the fifth largest exporter in the Americas (after
    the United States, Canada, Mexico, and Brazil). In 2001 Puerto Rico was
    the 8th largest trading partner of the United States, and the 13th
    largest market for U.S. products.
    ---------------------------------------------------------------------------
        \1\ Unless otherwise noted, all figures represent 2001 numbers, as
    listed in the Annual Report to the Governor, Puerto Rico Planning
    Board.
    ---------------------------------------------------------------------------
        Manufacturing is the largest sector in Puerto Rico's economy,
    occupying 39.9% of all productive activities and employing almost 14%
    of the workforce. Like many other open, industrial economies,
    manufacturing activity is extremely linked to foreign trade and
    investment: it is responsible for 99.6% of the total value of exports,
    compared with much lower values and percentages for most Caribbean and
    Central American countries (ECLAC 2001). Given the degree of openness
    of Puerto Rico's economy, any changes in the international commercial
    environment and its regulatory framework tend to have larger immediate
    consequences for the island's economy (for instance, employment and
    fiscal revenues), especially in manufacturing activities, than in most
    other U.S. jurisdictions.
        Much of Puerto Rico's manufacturing activities are based on foreign
    direct investment in capital-intensive, technologically advanced
    industries such as pharmaceuticals, biotechnology, and IT. A
    substantial portion of this investment (more than 75%) originates in
    the United States. Indeed, investments in Puerto Rico have yielded
    higher returns to investment than in many countries of comparable size
    and characteristics. Like many neighboring countries in Latin America,
    industrial exports originating from foreign investment constitute
    almost 95% of all exports. Nevertheless, contrary to other cases of
    foreign direct investment (FDI) in the Caribbean and Central America,
    such as the EPZs in the Dominican Republic, FDI in Puerto Rico
    possesses multiple backward and forward linkages to local capital
    industries and services (through sub-contracting, joint venture
    agreements, supply chains, and banking, among other activities). These
    linkages allow local companies to develop a strong and productive
    industrial and services platform. Exports from local capital companies
    constitute only 5% of total exports, but at a total of over $2 billion
    in 2001, their sales already exceed in value the entire export amounts
    of other Caribbean and Central American countries. It also means that
    changes in the foreign investment environment tend to have economies-
    of-scale effects in the industrial platform and economic performance of
    Puerto Rico.
        Considering these characteristics, Puerto Rico must continuously
    strive to maintain a substantial degree of competitiveness over
    neighboring countries and territories that also vie for foreign
    investment and pursue aggressive export policies. Our competitive
    scenario is compounded by the fact that, as an insular economy subject
    to U.S. minimum wage, environmental, and industrial regulation laws, as
    well as high shipping costs, Puerto Rico must compete for foreign
    investments and markets with low-wage, low-cost countries in Central
    and South America that also have advantages in natural resources, large
    domestic markets, and other endowments. Indeed, as a result of economic
    liberalization and other changes in the international economic
    landscape, in the last six years Puerto Rico has lost over 26,000
    manufacturing jobs to low-wage countries, proportionally more than any
    other U.S. jurisdiction.
        In this sense, under an FTAA we would already possess a competitive
    advantage in productivity, industrial quality standards, labor skills,
    and international best-practices in much of our industrial production.
    These advantages bring us closer to the U.S. market and will position
    us favorably to enter further markets in Latin America. Nevertheless,
    given some of our economic particularities as described above, any
    changes in the international trade system that introduce further
    competitive challenges for our Island will have a pronounced, immediate
    impact in our economy. This impact is qualitatively and quantitatively
    different from the effects the FTAA will have in other U.S.
    jurisdictions.

    II. Economic sectors in Puerto Rico under an FTAA

        Like any other economy, Puerto Rico is subject to advantages and
    disadvantages resulting from a free trade agreement such as the FTAA.
    Most of our advantages lie in sectors involving capital-intensive
    industries and services, a skilled labor force, high quality standards,
    management skills, and productive flexibility. Our challenges lie
    mainly, but not exclusively, in labor-intensive industries where
    foreign competition from low wage producers is fierce, and themes such
    as market access, economies of scale, and foreign investments.
        We believe that the FTAA introduces substantial incentives for
    activities such as financial services, chemicals and pharmaceuticals,
    biotechnology and IT, and in some industries linked to the food and
    beverages sector. These industries already comprise a large portion of
    Puerto Rico's current exports, both to the United States and markets in
    Latin America and the Caribbean. For instance, 20 out of the 30 most
    widely purchased drugs in the United States are manufactured in Puerto
    Rico. Under an FTAA our exports of drugs and drug-related products
    would be better able to enter newly opened markets in Latin America,
    and thus expand drug production significantly, by competing with other
    low-cost producers (such as Brazil). Recent investments in Puerto Rico
    by large pharmaceutical companies such as Abbott seem to confirm this
    forecast.
        A similar scenario may occur in banking and financial services,
    where Puerto Rican firms, already subject to the strong regulatory
    framework of the U.S. federal government, can export such services to
    Central America and the Caribbean. Given the virtual dollarization of
    the Caribbean region that may result from an FTAA, the potential for
    growth in the Puerto Rican banking sector is considerable.
        Labor-intensive industries, such as the food and beverage sector,
    are particularly prone to adverse competition resulting from an FTAA.
    The key element is the schedule of tariff reductions for such products,
    and the progressive growth of U.S. imports from low-wage, resource-rich
    countries. Puerto Rico's exports of food and beverage products, for
    instance, are mainly targeted at the Hispanic market of the United
    States (and some selected niches in the Caribbean and Europe). While
    many of these exports depend on consumer preferences for Puerto Rican
    products, rapid entry from other Caribbean and Central American
    products in the United States may represent formidable challenges for
    Puerto Rican exporters.
        Cases where Puerto Rican food and beverage producers have been
    exposed to aggressive competition from Latin American countries can be
    found in the recent decision of the U.S. Congress in re-authorizing the
    Andean Trade Preferences Act with respect to the tariff treatment of
    rumand canned tuna. Recognizing the critical importance of the rum
    industry to Puerto Rico's economy, Congress last summer reaffirmed
    long-standing U.S. policy by voting to exclude low-valued rum for
    tariff preferences under the Andean bill, while continuing trade
    liberalization in the higher valued segments of the rum market not
    dependent on price sensitivity. This wise decision by Congress
    reaffirmed the Solomonic framework for rum tariffs reached by the
    United States, the European Union, Canada and Japan in the 1997
    Singapore zero-for-zero agreement on distilled spirits. It also
    recognized that rum provides a key source of revenue for the
    Commonwealth's Government. Under long-standing principles governing the
    tax relationship between the United States and Puerto Rico, the United
    States returns to Puerto Rico's treasury federal excise taxes collected
    on Puerto Rican rum, which currently exceed one-third of a billion
    dollars annually.
        Congress also took similar action in the context of the Andean
    legislation with respect to trade in canned tuna. It recognized, based
    on a study by the U.S. International Trade Commission, that tariff
    liberalization in the canned tuna sector would quickly lead to the
    demise of the U.S. canned tuna industry in Puerto Rico, California and
    American Samoa, and the loss of thousands of jobs in this sector.
    Accordingly, Congress wisely decided to maintain existing tariff
    treatment of canned tuna in the Andean bill, while permitting duty-free
    treatment of pouched tuna--a separate and distinct product not directly
    competitive with canned tuna.
        A special mention must be made with respect to tourism. This
    industry is widely perceived by analysts as possessing some of the
    largest potentials for expansion in upcoming years. Tourism occupies
    approximately 6% of Puerto Rico's GDP, a proportion that is much lower
    than other Caribbean islands (in Jamaica, for instance, tourism is
    approximately 12% of GDP). Nevertheless, considering the size of our
    economy, the total value and output of Puerto Rico's tourism industry
    far exceeds that of most Caribbean and Central American countries.
    Competition in tourism is quite fierce in the Caribbean, and Puerto
    Rico has specialized in several market niches, especially those
    involving upper class and business executive tourism. Nevertheless, as
    economies in the region become more open, there will be tougher
    competition for some of the same clients that Puerto Rico currently
    attracts. Aggressive competition is expected in terms of attracting
    foreign investment in tourism, once room capacity and other such
    matters give way to product diversification and further market
    segmentation.

    III. Puerto Rico and the FTAA negotiations

        Although Puerto Rico maintains a keen interest in all committees of
    the FTAA, it is in market access, investment, intellectual property
    rights, and services where our most immediate and medium-term interests
    are focused.

    A. Market access issues

        In 2002 Puerto Rico's exports totaled $46,900.8 billion dollars, a
    figure that places the Island as the fifth largest exporter in the
    Americas (after the United States, Canada, Mexico, and Brazil). Indeed,
    as stated in a previous section of this document, foreign trade
    activities in the Island reach an equivalent of 68% of our GDP.
    Although our most important trading partner by far is the United
    States, we possess important trading relationships with some of our
    neighbors in Latin America, notably the Dominican Republic, Panama,
    Mexico, Costa Rica, Trinidad and Tobago, Venezuela, Brazil, and
    Argentina (see Table 1).
        Like the United States, Puerto Rico has a negative balance in most
    of our trade with Latin America and the Caribbean. Various factors lie
    behind this deficit, including supply and demand matters in foreign
    markets and the composition of Puerto Rico's exports, the adverse
    economic environment in the region since 2001, and the U.S. tariff
    schedules and regional preferences conceded to various Latin American
    countries through programs such as the CBTPA and the Andean Trade Act.
    In this sense, Puerto Rico encounters the same circumstances as any
    other U.S. jurisdiction in its commercial exchange with Latin America:
    average U.S. tariffs for a large portion of imported products is 1.6%,
    while the average bound duty for exports to Latin America and the
    Caribbean is 35%.
        A Free Trade Area of the Americas would help Puerto Rico ``level
    the playing field'' with respect to matters such as duties and non-
    tariff barriers that currently hamper some of our exports to Latin
    America and the Caribbean. For instance, our most important export
    items, pharmaceutical preparations and medical devices, encounter high
    tariff bound rates in South American markets such as Brazil, Argentina,
    and Peru. Although effective tariff rates (at 7.6% weighted average)
    are lower than these bound rates, substantial scope for tariff hikes or
    other duty changes within levels permitted by the WTO remains.
    Eliminating these tariffs would not only help our exports to these
    markets, but we would also increase our market share and diversify
    activities in the region (since European pharmaceutical companies
    currently possess a larger share of the Latin American market than U.S.
    companies).
        While Puerto Rico's pharmaceutical and electronic technology
    exports are competitive on a global scale given intra-industry trade
    patterns and other aspects of foreign direct investments in the Island,
    the competitiveness of other Puerto Rican industries based on local
    capital remains concentrated in the Caribbean Basin region. Many of
    these industries are small and medium-sized firms whose productive
    capacity enables them to maintain a presence in regional markets where
    they possess advantages such as geographical proximity and knowledge of
    consumer preferences. Yet these industries encounter substantial tariff
    and non-tariff barriers in the Caribbean region. For instance, in 2002
    Puerto Rico exported more than $86 million dollars to the Caribbean
    Basin in food and beverage products (see Table 2). The average
    Caribbean tariff for such items is 86%. A substantial tariff reduction
    would enable Puerto Rican food and beverage firms to increase their
    exports to the region, to increase their production, to generate
    employment, and ultimately to become more competitive in international
    markets.
        Other market access issues that Puerto Rican exporters encounter in
    the Caribbean Basin region involve inconsistent practices in matters
    such as customs valuation and cumbersome customs procedures, excessive
    import permits and other legal hurdles, discretionary product labeling
    requirements, and import payments and financing. In this sense, we
    believe it is important to incorporate trade facilitation discussions
    as a central topic in FTAA market access negotiations.
        We want to make special mention of the foreign trade zone (FTZ)
    regime operating in Puerto Rico and how such special trade regimes may
    be affected by FTAA negotiations. Puerto Rico's Foreign Trade Zone 61,
    and its sub-zones, constitutes the largest such trade zone under U.S.
    customs territory. Total value of forwarded merchandise from FTZ 61 for
    fiscal year 2002 summed $130,602,231. More than two thirds of this
    merchandise (69.46%) was forwarded to other parts of the U.S. Customs
    Territory. The FTZ regime is a key feature of a new international trade
    strategy in Puerto Rico that seeks to transform the Island into the
    largest and most complete center for international merchandise
    distribution and transshipment in the Caribbean Basin. Yet special
    regimes such as FTZs have been recently criticized as unfair export
    practices in certain academic and policy venues, and their future
    configuration and functions will most certainly be a matter of
    discussion in the current FTAA negotiations. Consequently, we propose
    that the USTR also take notice of the importance of our FTZs as it
    negotiates market access issues.

    B. Intellectual property

        Some of Puerto Rico's most important export products, especially
    those associated with advanced biological, chemical, or electronic
    technology, suffer from severe problems with respect to intellectual
    property rights in many countries throughout Latin America. In this
    sense, Puerto Rico supports all efforts to strengthen the enforcement
    of copyrights and patents, as well as pursuing other related matters
    affecting the proper implementation of intellectual property rights
    through FTAA negotiations.
        While some of Puerto Rico's most technologically advanced exports
    face intellectual property issues that are being addressed through the
    efforts of national associations such as the Pharmaceutical Research
    Manufacturers of America (PHRMA) and the National Association of
    Manufacturers (NAM), local Puerto Rican makers of indigenous products
    have trademark concerns with respect to trade liberalization in Latin
    America and the Caribbean. In particular, producers of rum and coffee,
    who face fierce competition from other Caribbean and Central American
    countries, do not possess geographical indications for their products
    such that these may be indistinctly recognized and marked as ``rums of
    Puerto Rico'' or ``Puerto Rican coffee'' under a free market regime. In
    such circumstances it is possible for any producer in the region to
    dump surplus output within the free trade area for the product to be
    processed and sold later elsewhere under the denomination of another
    country. In this sense, we believe that discussions about rules of
    origin and trademark procedures should be an important part of
    intellectual property and market access discussions in the FTAA
    negotiations.

    C. Investment

        The link between free trade and foreign direct investment has been
    extensively documented and empirically corroborated, particularly
    within free trade agreements comprising developed and developing
    countries. Latin America's proportion of U.S. foreign direct investment
    in 2000 amounted to 25%, a figure that has dropped slightly in the
    years 2001 and 2002 as a result of the slowing world economy and
    macroeconomic instability in countries such as Argentina, Brazil, and
    Uruguay. Nevertheless, based on the effects of NAFTA on foreign
    investment in Mexico, and after taking into consideration the
    gravitational direction of trade flows and the possibilities of intra-
    industry trade in the Americas, some increase in the level of
    investment to the region is to be expected as a result of the FTAA.
        Foreign investment has been the backbone of Puerto Rico's
    industrial development and its current role in participation in
    international trade. Investments in Puerto Rico have yielded higher
    returns to investment than in many countries of comparable size and
    characteristics. Like many neighboring countries in Latin America,
    industrial exports originating from foreign investment constitute
    almost 95% of all exports. Nevertheless, as had been stated previously,
    contrary to other cases of foreign direct investment (FDI) in the
    Caribbean and Central America, such as the EPZs in the Dominican
    Republic, FDI in Puerto Rico possesses multiple backward and forward
    linkages to local capital industries and services (through sub-
    contracting, joint venture agreements, supply chains, and banking,
    among other activities). These linkages allow local companies to
    develop a strong and productive industrial and services platform that
    serves both the foreign and domestic sectors of Puerto Rico's economy.
    Exports from local capital companies constitute only 5% of total
    exports, but at a total of over $2 billion in 2001, their sales already
    exceed in value the entire export amounts of other Caribbean and
    Central American countries (especially if domestic industry is measured
    separately from foreign-capital production). It also means that changes
    in the foreign investment environment tend to have economies-of-scale
    effects in the industrial platform and economic performance of Puerto
    Rico.
        Tax incentives and other fiscal instruments have been powerful
    tools the Commonwealth of Puerto Rico has used for attracting foreign
    investment. As indicated in Article 13 of the Draft Text on General and
    Institutional Issues, the FTAA's potential member nations will provide
    for special and differential treatment for various jurisdictions and
    sectors as circumstances dictate. While certain preferences regarding
    investment and competition policies may become abolished as a result of
    the FTAA negotiations, Puerto Rico respectfully requests that its
    specific circumstances and concerns be fully considered and addressed
    by the USTR in negotiating FTAA investment matters.

    D. Services

        Like many other countries in the Caribbean region, services
    constitute an important part of Puerto Rico's economy. We possess
    regionally competitive service industries, particularly tourism,
    telecommunications, banking, health and professional services. These
    industries would benefit from a reduction in import duties, taxes, and
    other trade obstacles, as well as efforts at harmonization of the legal
    framework governing the movement of naturals and the provision of
    professional services throughout the Caribbean and Central America. The
    successful entrance of Puerto Rican firms in the Dominican Republic
    once the government of that country liberalized its national
    telecommunications market may serve as an example of potential gains
    for Puerto Rican firms under an FTAA services regime in the region.
        Inadequate maritime transport in the Caribbean and Central America,
    however, has been a persistent problem in the region, especially in the
    case of smaller island countries. The costs of merchandise shipping
    from Puerto Rico to other destinations in the Caribbean region are
    higher than the rates for maritime transport to the United States.
    Although most of our exports go to the United States (see Table 1),
    shipping costs in the Caribbean is an important matter for Puerto
    Rico's small and medium sized producers whose natural markets lie in
    the Caribbean area. An important reason for such expensive maritime
    transport is the lack of economies of scale for shipping products to
    the small islands in the Eastern Caribbean, market fragmentation, and
    trade facilitation problems. However, there are other obstacles, such
    as deficient port and maritime infrastructure to support merchandise
    movement in both the Caribbean islands and Central America. These
    factors hinder Puerto Rico's export potential in the region. In this
    sense, we believe that the problems of maritime and air transportation
    in the Caribbean and Central America should be addressed in the
    Services Negotiating Committee of the FTAA.
        In closing, we would like to reiterate Puerto Rico's commitment to
    trade liberalization in the Western Hemisphere. We strongly believe
    that the FTAA negotiations present a unique opportunity to open markets
    and to create common trade rules that will foster a more prosperous
    economic environment for all countries and regions involved. We look
    forward to working with the Administration, Congress and our trading
    partners to ensure that the FTAA will provide both free and fair trade
    for Puerto Rico.

    Table 1: Puerto Rico's main trading partners, 2002
               PUERTO RICO'S IMPORTS, TOP 20 COUNTRIES OF ORIGIN

    ------------------------------------------------------------------------
             COUNTRY                   CODE                   VALUE
    ------------------------------------------------------------------------
       1. United States                 ------           $14,561,281,964
             2. Ireland                   4190             6,260,429,348
               3. Japan                   5880             1,435,648,062
    4. Dominican Republic                 2470               706,476,540
    5. U.S. Virgin Islands              ------               687,183,238
             6. Germany                   4280               424,912,507
      7. United Kingdom                   4120               385,301,239
               8. Italy                   4759               339,939,640
              9. France                   4279               336,303,381
             10. Mexico                   2010               288,060,915
             11. Brazil                   3510               287,614,800
          12. Venezuela                   3070               284,877,430
    13. China, People's Rep.              5700               258,827,241
    14. Trinidad and Tobago               2740               257,907,864
            15. Belgium                   4231               233,930,201
             16. Canada                   1220               220,062,959
        17. Switzerland                   4419               207,700,495
         18. Costa Rica                   2230               156,434,658
              19. Spain                   4700               151,840,863
          20. Argentina                   3570               141,701,515
             21. Others                 ------             1,358,158,025
                                         TOTAL           $28,984,592,885
    ------------------------------------------------------------------------

                PUERTO RICO'S EXPORTS, TOP 20 DESTINATIONS, 2002

    ------------------------------------------------------------------------
             COUNTRY                   CODE                   VALUE
    ------------------------------------------------------------------------
       1. United States                 ------           $41,739,694,192
      2. United Kingdom                   4120               731,169,566
         3. Netherlands                   4210               655,516,382
    4. Dominican Republic                 2470               633,492,403
             5. Belgium                   4231               424,569,643
               6. Japan                   5880               319,499,547
             7. Germany                   4280               316,237,347
              8. France                   4279               287,933,750
               9. Italy                   4759               292,341,881
            10. Ireland                   4190               236,629,230
             11. Canada                   1220               200,439,684
             12. Israel                   5081               122,025,446
              13. India                   5330               104,746,194
        14. Switzerland                   4419                82,082,528
             15. Panama                   2250                77,807,445
             16. Mexico                   2010                75,548,916
    17. U.S. Virgin Islands             ------                69,741,694
        18. South Korea                   5800                50,336,232
    19. China, People's Rep.              5700                41,848,842
          20. Australia                   6021                41,303,513
             21. Others                 ------               669,290,880
                                         TOTAL           $47,172,255,315
    ------------------------------------------------------------------------

    Table 2: Puerto Rico's main export and import products, 2002

    ------------------------------------------------------------------------
      Exports from Puerto Rico to Foreign
                   Countries               ---------------------------------
    ---------------------------------------
                  Description                   SIC             Value
    ------------------------------------------------------------------------
          1. Pharmaceutical Preparations        2834         $2,220,333,795
    2. Medicinal Chemicals and Botanical        2833            640,588,895
                                 Products
    3. Industrial Organic Chemicals, Not        2869            432,332,557
                   Elsewhere Classified *
     4. Flavoring Extracts and Flavoring        2087            178,753,244
       Syrups, Not Elsewhere Classified *
      5. In Vitro and In Vivo Diagnostic        2835            177,122,111
                               Substances
       6. Electronic Computing Equipment        3573            143,694,660
     7. Surgical and Medical Instruments        3841            138,019,881
                            and Apparatus
        8. Men's and Boy's Underwear and        2322            104,341,490
                                Nightwear
             9. Computer Storage Devices        3572             97,597,599
         10. Orthopedic, Prosthetic, and        3842             92,463,406
         Surgical Appliances and Supplies
         11. Pesticides and Agricultural        2879             64,299,376
     Chemicals, Not Elsewhere Classified *
     12. Brassieres, Girdles, and Allied        2342             48,677,526
                                 Garments
    13. Noncurrent-Carrying Wiring Devices      3644             47,386,457
         14. Radio and TV Communications        3662             44,158,165
                                Equipment
    15. Telephone and Telegraph Apparatus       3661             40,406,964
      16. Relays and Industrial Controls        3625             37,296,065
                  17. Petroleum Refining        2911             33,641,031
    18. Primary Smelting and Refining of        3339             33,015,725
     Nonferrous Metals, Except Copper and
                                    Alum.
      19. Miscellaneous Plastic Products        3079             32,909,142
    20. General Industrial Machinery and        3569             32,205,560
     Equipment, Not Elsewhere Classified *
                              21. Others      ------            723,575,780
                                    TOTAL                    $5,362,819,429
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
      Imports to Puerto Rico from Foreign
                   Countries               ---------------------------------
    ---------------------------------------
                  Description                   SIC             Value
    ------------------------------------------------------------------------
    1. Medicinal Chemicals and Botanical        2833         $5,591,083,171
                                 Products
    2. Industrial Organic Chemicals, Not        2869          2,370,657,695
                   Elsewhere Classified *
                   3. Petroleum Refining        2911            850,385,434
          4. Pharmaceutical Preparations        2834            779,431,637
     5. Motor Vehicles and Passenger Car        3711            672,505,608
                                   Bodies
      6. Crude Petroleum and Natural Gas        1311            217,123,226
     7. Surgical and Medical Instruments        3841            195,482,712
                            and Apparatus
          8. Men's and Boy's Underwear &        2322            147,999,306
                                Nightwear
       9. Nonclassifiable Establishments        9900            109,104,469
          10. Switchgear and Switchboard        3613            104,285,493
                                Apparatus
         11. Steel Works, Blast Furnaces        3312            100,846,323
      (Including Coke Ovens), and Rolling
                                    Mills
                 12. Meat Packing Plants        2011             93,579,977
      13. Miscellaneous Plastic Products        3079             81,615,783
    14. Prepared Fresh or Frozen Fish and       2092             77,448,681
                                 Seafoods
     15. Brassieres, Girdles, and Allied        2342             69,376,931
                                 Garments
                         16. Paper Mills        2621             67,623,331
    17. Wood Household Furniture, Except        2511             64,420,109
                              Upholstered
                      18. Malt Beverages        2082             63,406,291
         19. Ceramic Wall and Floor Tile        3253             50,499,285
         20. Boot and Shoe Cut Stock and        3131             50,401,411
                                 Findings
                              21. Others      ------          1,978,850,810
                                    TOTAL                   $13,736,127,683
    ------------------------------------------------------------------------

    Statement of Edward P. Denninger, Sr., J.G. Eberlein & Co., Inc., West
                                Islip, New York
    TO: HOUSE COMMITTEE ON WAYS AND MEANS

    SUBJECT: TRADE AGENDA COMMENTS

        The legislative policy underlying the duty drawback program is to
    increase the competitiveness of American industry in the global
    marketplace when competing against lower priced exports from our
    trading partners. The existing drawback program benefits American
    manufacturers and exporters by increasing their competitiveness by
    providing an advantage either at the margin for pricing goods in the
    export market or at the lower overall costs of production.
        The drawback program was initiated to create jobs and encourage
    manufacturing and exports. U.S. Customs has acknowledged this by
    stating that

            LThe rationale for drawback has always been to encourage
            American commerce or manufacturing or both. It permits the
            American manufacturer to compete in foreign markets without the
            handicap of including in its costs and consequently in its
            sales price, the duty paid on imported merchandise.

        Clearly, the intent of Congress it to grant drawback when and
    wherever possible to the benefit of American companies, not to limit
    drawback simply because the United States enters into an FTA, which
    purpose is to provide the greatest overall benefit to American
    exporters.
        Many imported items are subject to Normal Trade Relations (NTR)
    duty rates when imported into the United States. Therefore, to include
    in any FTA a restrictive drawback program like that in the NAFTA, and
    thereby limit drawback, would place American companies at a substantial
    competitive disadvantage as compared to our trading partners.
        Duty drawback lowers production costs and operating costs by
    allowing manufacturers and exporters to recover duties that were paid
    on imported materials when the same or similar materials are exported
    either as finished products or as component parts of a finished
    product. This advantage must be maintained as part of U.S. policy to
    foster growth and development within the United States and to increase
    United States export competitiveness abroad.

                            National Association of Foreign-Trade Zones
                                                   Washington, DC 20036
                                                         March 12, 2003
    Trade Agenda Comments to the
    Committee on Ways and Means

        The National Association of Foreign-Trade Zones recommends that the
    ``National Treatment-Market Access Chapter'' of prospective free trade
    agreements incorporate a modified version of NAFTA's Article 303
    paragraph 6. This proposed modification would add a seventh set of
    circumstances for which restrictions for so-called duty drawback rules
    should not apply. This seventh set would cover:

        L(g)(1) Any good manufactured in the territory of a party and
    subsequently exported to the other party where the importing party's
    effective external rate of duty is zero, or
        L(2) Any part, component, or material used in the manufacture of
    any good in the territory of a party that is subsequently exported to
    the other party where the importing party's effective external rate of
    duty for the part, component of material is zero.

        This recommendation flows directly from the experiences observed
    during the negotiation of NAFTA and measures initiated by our NAFTA
    partners upon the agreement's inauguration.
        So-called anti-platforming measures are sine qua non for the
    conclusion of foreign trade agreements such as the North American Free
    Trade Agreement and the recently concluded U.S.-Chile Agreement. These
    measures usually include:

         LRules of Origin that direct the flow of economic benefits
    to the national economies of the trade agreement's participating
    nations or parties.
         LRestrictions on the use of duty deferral and/or duty
    drawback measures that extend the flow of benefits upstream to supplier
    industries, and
         LThe Agreement's rate reduction staging schedule that (is
    not strictly speaking an anti-platforming measure that nevertheless)
    creates background pressure or guidance for deciding how strenuously
    origin rules and drawback restrictions should be imposed for any given
    product or industry.

        Large amounts of effort were undertaken by U.S. negotiators during
    the NAFTA negotiations to provide an efficient set of anti-platforming
    measures. The Agreement's provisions are a self-evident statement on
    the results of their efforts. Nonetheless, these efforts were greatly
    undermined by our NAFTA partners by the stroke of their proverbial pen,
    upon the inauguration of their NAFTA anti-platforming commitments. This
    diminishment of the rules was put into effect because there was one
    matter beyond the reach of U. S. NAFTA negotiators that was and is the
    foundation upon which all the rules are based, i.e. how our partners
    adjusted or modified their external tariff rate structure to offset the
    consequences NAFTA's rules imposed.
        NAFTA's current roster of anti-platforming measures combined with
    the tariff suspension/elimination measures initiated by Mexico and
    Canada (at the time their respective 303 responsibilities commenced)
    are a hardship on all U.S.-based manu- facturing activity. These
    measures are unassailable under NAFTA and/or the provisions of the WTO.
    Nevertheless, these Canadian and Mexican measures, combined with
    NAFTA's article 303, have created unanticipated and uncompensated trade
    benefits in the U.S. market by non-NAFTA parties, while at the same
    time diminishing the anticipated export opportunities for U.S.
    manufacturers in the Canadian and Mexican markets. Both of the
    unanticipated consequences are due to non-NAFTA participants' exports
    to our NAFTA partners under conditions more favorable than those
    available to U.S. based manufacturers.
        We agree with those recommendations put forward to you that state
    all of our nation's FTA's should adopt effective anti-platforming
    measures. We believe our collective experiences with NAFTA provide
    guidance on how effective anti-platforming measures should be defined.
    We suggest the proposed seventh exemption from any future FTA's duty
    drawback limitations will demonstrate a lesson learned.
        Regards,
                                                       Donnie B. Barnes
                                                              President

                                  National Association of Manufacturers
                                                   Washington, DC 20004
                                                         March 12, 2003
    Ways & Means Committee
    House of Representatives
    Via E-mail: hearingclerks.waysandmeans@mail.house.gov

    Members of the Committee:

        The National Association of Manufacturers appreciates this
    opportunity to submit comments for inclusion in the official record of
    the Committee's February 26, 2003 hearing on U.S. trade policy and the
    U.S. trade agenda.
        Manufacturing in our country is challenged today as never before.
    Our 14,000 companies find themselves on the front lines of the most
    intense global competition in history, a competition that makes it
    virtually impossible for them to raise prices even as costs continue to
    rise appreciably. Despite outstanding productivity, innovation and
    efficiency gains by U.S. manufacturers, the current economic climate
    has yielded the slowest manufacturing recovery in decades and a decline
    in manufacturing employment of more than two million jobs.
        Many factors have led us to these sobering circumstances, and the
    NAM's Board of Directors in February 2003 approved a multi-pronged,
    comprehensive strategy to tackle a broad range of problems through
    persistent governmental policy reform and action. One of the major
    challenges is the continued existence of international trade and
    investment barriers that inhibit manufacturing exports and the conduct
    of business abroad. The reduction and removal of those barriers can
    only be achieved through a proactive U.S. trade policy that includes
    strong American leadership in negotiating trade agreements. It is on
    this aspect of U.S. trade policy that we wish to concentrate our
    remarks.
        The NAM supports the Bush Administration's aggressive policy of
    competitive liberalization, which aims to maximize U.S. leverage by
    pursuing free-trade negotiations simultaneously at the multilateral,
    regional and bilateral levels. We concur with the notion that it is in
    the interest of the United States to have multiple negotiating options
    and partners so as not to be held hostage to foot-draggers in any one
    particular negotiation and in order to set trade-liberalizing
    precedents that can be transferred from one set of talks to another.
        We do believe, however, that optimal implementation of this pro-
    active multi-front strategy may require additional human and budgetary
    resources if it is to be sustained or expanded. The Ways & Means
    Committee should take this into account and make appropriate funding
    recommendations to its colleagues on the Appropriations Committee. If
    the United States is to obtain high-quality trade agreements, it must
    make available sufficient negotiating resources.
        Beyond the raft of negotiations currently underway, the NAM would
    be most enthused by an effort to obtain significant gains for U.S.
    manufacturing exports by extending the cutting-edge disciplines of the
    Singapore agreement to other Asian economies. In this regard, the
    Enterprise for ASEAN Initiative announced last year by Ambassador
    Zoellick remains of strong interest to the NAM.
        The NAM also wishes to point out one section of the Trade Act of
    2002 that does not seem to have been implemented yet. The Trade Act's
    Paragraph 2102(c)(12) explicitly calls for consultative mechanisms to
    be established among parties to trade agreements to scrutinize whether
    a foreign government has manipulated its currency to promote a
    competitive advantage in international trade. The NAM has not seen this
    paragraph utilized by the Administration, and urges this be rectified.
    There is widespread concern, particularly regarding Asian currencies,
    that countries are intervening to maintain their currencies at
    deliberately low rates, which puts U.S. agricultural, industrial, and
    services producers at a disadvantage.
        The remainder of our comments will focus on U.S. manufacturing
    priorities in the ongoing WTO, FTAA, and bilateral negotiations.

    WTO and the Doha Development Agenda

        The NAM acknowledges agriculture's prominent place atop the Doha
    Development Agenda (DDA). Without progress on agricultural reform, a
    successful round is all but impossible. We recognize that to obtain the
    enthusiastic participation of the developing countries in the WTO
    talks, the United States, Europe and Japan must engage each other and
    the rest of the world on agriculture. The Committee should remain
    concerned, as are we, that there appears to be little progress toward
    making the March 31, 2003 deadline on establishing modalities for
    agricultural market access negotiations. A failure or postponement
    there will no doubt reverberate throughout all other aspects of the
    talks, including those of most importance to makers of industrial
    goods.
        Nonetheless, the NAM reminds the Committee that U.S. agricultural
    exports will total to a little more than $50 billion a year, whereas
    our manufacturing exports total nearly $50 billion each month. And this
    tilt toward manufacturing trade is not exclusively an American
    phenomenon. Nearly eight out of ten export sales across the globe are
    also manufactures. What this means, of course, is that there are many
    trading partners in the WTO who should share our interest in further
    liberalizing trade in manufactured products.
        However, U.S. industrial exports continue to face
    disproportionately high trade barriers overseas. Whereas U.S.
    industrial tariffs average less than 2 percent, we often face bound
    tariff levels averaging 18 percent in the developing countries of Asia
    or 31 percent in South America. This is a reality that the nation's
    senior trade policymakers simply must take into account in determining
    the optimal strategic approach for achieving the broadest possible U.S.
    gains in trade negotiations.
        Likewise, the NAM recognizes that a failure by the United States to
    comply with the WTO decisions regarding the Foreign Sales Corporation/
    Extraterritorial Income regime could also prejudice a successful
    outcome to the WTO negotiations. However, repeal of ETI should be
    coupled with an alternative, WTO-compliant benefits regime that
    preserves as much of the benefit as possible for U.S.-based
    manufacturers that currently employ ETI.
        Another factor of concern to the NAM is the need to insist on
    strict compliance by China and other new entrants to the WTO with their
    accession commitments. Failure to insist on complete compliance and
    fair practices would risk undermining support for the WTO among U.S.
    business, Congress, and the American public.
        The interests of U.S. manufacturers run throughout the entire Doha
    Development Agenda of world trade negotiations. Here we will highlight
    five areas of particular importance: industrial tariffs, non-tariff
    barriers, transparency in government procurement, customs facilitation,
    and intellectual property rights.

    Industrial Tariffs

        The WTO non-agricultural market access negotiations should aim at
    achieving the broadest and deepest possible reductions in tariffs and
    non-tariff measures, with the particular objective of totally
    eliminating as many tariffs as possible. In the absence of substantial
    gains in genuine non-agricultural market access, the DDA simply could
    not be considered a success. Merely bringing bound rates down to the
    level of existing applied rates, for example, would be an unacceptable
    outcome--for no genuine improvement in market access would result.
        We therefore are very pleased with the Administration's historic
    WTO non-agricultural market access proposal calling for the total
    elimination of all industrial tariffs by 2015. Achieving this ambitious
    result would speed global economic growth and living standards
    worldwide. Many of our members are especially pleased that the
    Administration not only set forth the visionary goal of complete tariff
    removal, but also incorporated some key intermediate steps designed to
    move the world toward that goal in a pragmatic way.
        As the Administration's proposal recognizes, a combination of
    negotiating methods (``modalities'') is needed to achieve this bold
    objective. This combination involves a sectoral tariff elimination
    modality (STE--often referred to as ``zero-for-zero''), wherever
    possible, supplemented by a more general approach that would rely
    principally on an overall formula cut. Any formula, however, must
    result in genuine reductions in tariffs--i.e., reductions in the actual
    applied rates. Additionally, the modality combination must include a
    request-offer approach for those industries whose complexities cannot
    be addressed appropriately by a formula approach.
        Many NAM members believe that the most practical method of
    obtaining the greatest non-agricultural market access gains is through
    the STE, or zero-for-zero, modality. STE is a proven approach that
    solves negotiating problems other modalities cannot manage--
    particularly in resolving the problem of the huge disparity between the
    generally low U.S. industrial tariffs and the high tariffs in
    developing countries. For more detailed information on how an STE
    modality would work, we refer you to the submission from the Zero
    Tariff Coalition, which is comprised of 25 U.S. industrial sectors that
    believe this approach would work for them. That coalition, brought
    together by the NAM in 1999, is now working closely with USTR and the
    Commerce Department to promote support for a zero-for-zero modality
    among other nations' industries and governments.
        As not all sectors will participate in the STE approach, that
    modality should be accompanied by a formula approach to ensure that
    tariff cuts are made across the board in all sectors. The aggressive
    U.S. formula proposal is ideal in this respect. It would be calculated
    based on applied rather than bound rates and would slash all tariffs to
    no more than 8 percent after five years and then eliminate them over
    five more years.
        The complexity of the market-access situation in some sectors,
    moreover, means that there must be provision for some exceptions to
    this overall guideline--including providing for a request-offer
    approach for industries that view such an approach as more likely to
    achieve the results they seek. The request-offer modality is necessary
    to provide appropriate flexibility to U.S. negotiators in dealing with
    some sectors and industries. Failure to mention this modality is
    perhaps the only shortcoming, in NAM's view, to USTR's outstanding
    industrial market proposal last November.

    Non-Tariff Barriers

        Negotiations on non-tariff barriers (NTBs) are explicitly provided
    for in the Ministerial Declaration and need to be addressed as an
    essential feature of the non-agricultural market access negotiations.
    NTBs have been rising in importance as trade-distorting factors,
    including such measures as discriminatory standards, conformity
    assessment requirements, pre-shipment inspections, custom valuation
    practices, regulatory requirements, port procedures, and security
    procedures. Building on the incomplete NTB work of previous
    multilateral trade negotiations, a strong effort should be made to
    reduce or eliminate the trade-impeding effects of non-tariff measures.
        Care must be taken, however, to ensure that any such effort in no
    way is used to undermine legitimate health, safety, and environmental
    protections that are WTO compliant and based on strong scientific
    justification. Additionally, as noted above, WTO-consistent trade
    remedies are not non-tariff trade measures.
        A realistic way to proceed with NTB negotiations may be via a
    request-offer process, in which countries develop lists of other
    countries' practices that impede trade, and then exchange commitments
    to eliminate or alter those practices. A rules-based approach may also
    prove useful, reexamining issues such as customs valuation, pre-
    shipment inspection, standards and conformity assessment, and others.
    There may be considerable opportunity for improvement without reopening
    previous agreements, particularly through the device of agreeing on
    clarifications or interpretations to increase the effectiveness of
    existing agreements. NTB concessions should be quantified in an
    agreeable fashion, enabling their resulting reductions to be taken into
    effect in calculating the overall balance of concessions.

    Transparency in Government Procurement

        Another Doha priority for the NAM continues to be the achievement
    of an effective agreement for transparency in government procurement.
    Government procurement represents nearly fifteen percent of the world's
    GDP, a potentially massive global market. U.S. firms compete very
    strongly and effectively in that market when purchasing decisions are
    based on cost, quality and other competitive factors. Our exporting
    firms are less successful when government purchasing decisions are made
    behind closed doors--in non-transparent ways that allow bribery and
    corruption to come into play. Unfortunately, the latter situation
    describes the procurement process in many developing countries today,
    where public notification and due process with respect to tenders are
    often the exception rather than the rule.
        Developing countries have not signed on to the existing WTO
    Government Procurement Agreement, but the proposed new WTO agreement on
    transparency of government procurement is one that would address many
    of the problems in a way that we believe can be accepted by the
    developing countries. Transparency in government procurement would
    benefit not just U.S. exporters in competing against other exporters on
    a more level playing field, but would also be a major factor helping
    developing countries. It would be a strong force making corruption more
    difficult and would channel much more of their resources into efficient
    purchases and away from bribery.
        The NAM was disappointed that the Doha Declaration pushed off
    negotiations on transparency in government procurement until after the
    Cancun WTO ministerial this coming September. The Committee and the
    Administration should focus on ensuring that there is no further delay
    in launching and concluding this critical aspect of the overall
    negotiating round.

    Customs Facilitation

        Another area in which the start of negotiations has been delayed
    until Cancun is that of business facilitation--agreement on simpler and
    less costly customs and other trade rules. This is of particular
    importance to the 95 percent of American exporters who are small and
    medium-sized and see current trade rules as expensive trade barriers.
    Additionally, small firms as well as large would benefit from WTO rules
    that would ensure cyberspace would remain a tariff-free area permitting
    the further rapid growth of global e-commerce. As with transparency in
    government procurement, the Committee and the Administration should act
    in coming months to ensure that formal negotiations move ahead in
    Cancun.

    Intellectual Property Rights

        The competitive advantage of American manufacturing relies
    increasingly on its advanced technology and the protection of that
    technology--in other words, on effective enforcement of intellectual
    property rights. In that regard, the United States should continue to
    press our WTO trading partners for full and timely implementation of
    the Agreement on Trade-Related Intellectual Property Rights (TRIPs)
    negotiated in the Uruguay Round.
        Lessening the protection of intellectual property would have
    profound negative consequences not just for our global competitive
    position, but also for the flow of new inventions that will allow
    people all over the world to enjoy a higher quality life. President
    Abraham Lincoln's reminder that ``the patent system added the fuel of
    interest to the fire of invention'' applies as well to the TRIPs
    agreement.
        Further, the rampant counterfeiting and piracy of consumer products
    that occurs in many developing countries also poses a severe risk of
    personal injury or loss of life related to customer use. Legitimate
    U.S. manufacturers have no control over the safety or quality of
    ingredients that are formulated into these fake products. The risk to
    consumers' health and safety, coupled with the severe economic harm
    done to U.S. producers, warrant a higher level of attention by the
    Committee to this issue.

    Free Trade Area of the Americas (FTAA)

        The NAM is strongly supportive of actions the Administration has
    taken to move the Free Trade Area of the Americas negotiations forward.
    The FTAA is the critical regional piece of Ambassador Zoellick's
    ``competitive liberalization'' strategy, and it is imperative that the
    hemispheric talks stay on track for conclusion by early 2005. The
    Committee should know that the NAM estimates that an effective FTAA
    would result in a tripling of U.S. exports to Central and South America
    within a decade of implementation--from today's $60 billion of annual
    exports to nearly $200 billion.
        The FTAA therefore represents a major challenge and a major
    opportunity for the U.S. government, U.S. business, U.S. society, and
    the Western Hemisphere as a whole. The process of obtaining Trade
    Promotion Authority was a difficult, drawn-out struggle that cost the
    United States in terms of its policy credibility in the hemisphere.
    While congressional approval of the Trade Act of 2002 has helped reduce
    concern about U.S. trade views to some extent, suspicion of U.S.
    commitment to open markets is at an all-time high in the Americas. When
    coupled with the recent period of financial volatility and political
    uncertainty, the doubts about the U.S. commitment to open markets has
    reduced the political constituency in favor of free trade in virtually
    every Latin American country.
        As in other negotiations, we believe a principal focus must be on
    removing developing country tariffs on industrial goods as
    expeditiously and comprehensively as possible. Our preliminary
    understanding of the initial market access offer tabled by the United
    States last month is highly positive. We look forward to learning more
    about it and about the initial offers of other FTAA countries, and our
    members plan to intensify their engagement with USTR in the months
    leading up to the June 15 deadline for submitting requests for improved
    offers.
        The Administration's proposal calls for a wide range of industrial
    sectors to have their duties eliminated immediately under the FTAA. NAM
    members from those sectors applaud that initiative and expect the
    Administration to follow-up its initial offer with aggressive pursuit
    of other countries' agreement to up-front duty elimination. The NAM and
    others in the U.S. business community continue to do their part through
    active participation in the Americas Business Forum and in bilateral
    discussions with foreign counterparts.
        In the NAM's view, a successful FTAA must accomplish at least six
    goals that are particularly critical for U.S. manufacturing. They are:
    1) rapid removal of industrial tariffs; 2) design of simplified and
    uniform rules of origin; 3) removal of non-tariff barriers, including
    technical barriers to trade and customs-related measures; 4)
    elimination of barriers and conditions on investment; 5) improved
    protection of intellectual property rights, especially by stepped-up
    enforcement; and 6) comprehensive, transparent, and effective access
    for bidding on government contracts from a broad range of federal and
    sub-federal entities.

    Bilateral Agreements

        The NAM strongly supports congressional passage of the recently
    concluded free trade agreements with Chile and Singapore. We are
    playing a leadership role in the U.S.-Chile Free Trade Coalition and
    are also a principal member of the U.S.-Singapore FTA Coalition. Both
    agreements provide front-loaded tariff removal for industrial and
    consumer goods. They are largely state-of-the-art, cutting edge
    agreements that advance disciplines of interest to manufacturers in the
    areas of intellectual property rights, customs facilitation, access to
    competitive services, investment protection, and electronic commerce.
    They also faithfully implement the TPA compromise on labor and
    environmental issues related to trade by incorporating labor and
    environmental provisions into the dispute settlement provisions of the
    core agreement, while emphasizing cooperative action and monetary fines
    over resort to removal of trade benefits.
        With respect to the upcoming crop of negotiations just getting
    underway, the NAM takes strongest interest in the Central America and
    Australia accords. Central America is of interest because of its role
    in catalyzing the FTAA negotiations. Australia holds much promise
    because elimination of its average 4.7 percent tariff on U.S. goods
    could produce an estimated additional $1.8 billion in annual sales of
    U.S. manufactured products.

    Conclusion

        The NAM appreciates this opportunity to inform the Ways & Means
    Committee about its views on the U.S. trade policy agenda.
        Respectfully yours,
                                                            Frank Vargo
                                                         Vice President
                                   International Economic Affairs Dept.

        Statement of the National Electrical Manufacturers Association,
                               Rosslyn, Virginia

               Worldwide Tariff Elimination for All NEMA Products

         LObjectives: The world-wide elimination of tariffs on
    electrical products is a basic NEMA goal. We are founding members of
    the Zero Tariff Coalition, and earlier played active roles in pushing
    for the APEC EVSL and ATL initiatives. We therefore urge the U.S. to
    pursue tariff elimination for electrical products in all fora,
    including through sectoral talks under the World Trade Organization
    ``Doha Development Agenda'' (DDA) round of negotiations, and through
    regional and bilateral negotiations. WTO members should agree to
    implement so-called ``zero-for-zero'' agreements to eliminate tariffs
    on electrical products as soon as possible, preferably on an early
    provisional basis with immediate effect until these ``Free'' tariff
    rates are bound into the DDA round's final concluding agreement.
            L  NEMA also urges the U.S. to push for completion of the
            second phase of the Information Technology Agreement (known as
            ``ITA-2''), which would eliminate tariffs on a wide range of IT
            items, including some NEMA products. NEMA also supports
            continued efforts by U.S. officials to expand the membership of
            the existing ITA.
         LBenefits: While U.S. electrical exports have been
    generally growing around the world over the last ten years, they have
    increased most dramatically in two instances where tariffs were
    eliminated: (1) to Mexico since the NAFTA agreement came into being;
    and (2) for medical devices worldwide following the WTO Uruguay Round
    medical devices sectoral zero-for-zero tariff elimination agreement. We
    would like to see these stories emulated elsewhere; they don't just
    benefit our companies, they serve to make the best, most price
    efficient products available to consumers and companies in other
    countries.

    Negotiate and Ratify Free Trade Agreements (Bilateral, Regional and
    Multilateral)

    that Further Open Commerce in Electrical Goods While Upholding NEMA
    Principles

         LFree Trade Agreements: NEMA lobbied long and hard for
    Trade Promotion Authority, and we now urge Congress to quickly ratify
    the bilateral FTAs recently negotiated with Chile and Singapore. We
    also encourage the Administration to pursue NEMA priorities such as the
    following in the many other multilateral (as in the WTO Doha
    Development Agenda), regional (as in the Free Trade Area of the
    Americas), and ``bilateral'' (e.g., Morocco, Central America, Australia
    and Southern Africa) negotiations it is pursuing:

                     LTariff Elimination
                     LNo Mutual Recognition Agreements (MRAs) For
                    Non-Federally-Regulated Products
                     LEnergy Services Liberalization
                     LOpenness and Transparency in Government
                    Procurement
                     LProtection of Intellectual Property Rights
                     LReduction in Technical Barriers to Trade
                    (TBTs) and Compliance with all World Trade Organization
                    (WTO) TBT Agreement Requirements
                     LInclusive Definition of ``International
                    Standards''
                     LVoluntary, Market-Driven Standards and
                    Conformity Assessment
                     LEffective Monitoring and Enforcement
                    Mechanisms
                     LFree Trade Benefits Not Encumbered By Labor
                    Or Environmental Provisions
                     LAs Many Other Market Opening Measures As
                    Possible

         LFree Trade Area of the Americas (FTAA) Talks,
    Particularly the Negotiating Group on Market Access (NGMA): As talks
    toward the 2005 creation of an FTAA shift into a higher gear in early
    2003, NEMA looks forward to continued leadership from the
    Administration and Congress. NEMA also encourages all FTAA countries to
    implement customs facilitation measures to which they have already
    agreed. Moreover, NEMA urges the U.S. to convince the Hemisphere that
    any standards and conformity assessment provisions included in an FTAA
    must mirror the WTO TBT Agreement. NEMA will continue to be engaged in
    the process, and exchange views with its industry counterpart
    associations throughout the Americas.
         LOpposition to Mutual Recognition Agreements (MRAs): In
    NEMA's view, the use of MRAs should be limited and considered only as
    an alternative for conformity assessment needs when applicable to
    federally regulated products such as medical devices. MRAs are not the
    answer to conformity assessment needs in non-regulated areas; if
    anything, they serve to encourage the creation of unnecessary product-
    related regulation. In this regard, while we strongly objected to the
    inclusion of an electrical safety annex in the U.S. MRA with the
    European Union a few years ago, we are pleased that the Administration
    has either excluded electrical products from subsequently negotiated
    MRAs or refused to sign on to any such accords that include them. We
    look forward to a continuation of that stance, and trust that the
    Administration will not entertain intergovernmental MRAs as a part of
    current free trade negotiations.
         L``International'' Standards: In addition, the U.S.
    government must continue working to dispel the misinterpretation that
    the use of the term ``international standards'' in the WTO TBT
    agreement applies only to International Electrotechnical Commission
    (IEC), International Standards Organization (ISO) and International
    Telecommunications Union (ITU) standards. An interpretation should also
    include widely-used norms such as some North American standards and
    safety installation practices that meet TBT guidelines.
    Misinterpretation can be disadvantageous to U.S. businesses' efforts to
    sell in global markets. Moreover, the importance of openness and
    transparency are lost when focus is placed only on those three
    standards bodies.
         LEnergy Services Liberalization: NEMA supports
    liberalization of trade in energy services, in order to allow more
    people worldwide to enjoy high quality, affordable energy, and also to
    provide new opportunities to those energy service and electricity
    providers who use the equipment made and services provided by NEMA's
    members. Thus, NEMA is an active member of the industry coalition
    campaigning for the inclusion of commitments on energy services in the
    WTO's ongoing negotiations on services under the DDA. NEMA's primary
    perspective is that of the industry that provides the equipment and
    products used to build and maintain electrical energy systems, but many
    NEMA members are active providers of energy services as well. The
    liberalization that is good for utilities is also good for our
    manufacturers, service suppliers, and for the users of electricity.
    USTR has included energy services in its proposals for the WTO services
    negotiations and, in the run-up to the WTO Cancun Ministerial, we look
    forward to continued efforts from the Bush Administration and support
    from Congress to secure commitments from our trading partners in this
    crucial area.
         LTransparency in Government Procurement: Around the world
    a lack of transparency in awarding contracts has served to unfairly
    exclude U.S. companies on countless occasions. It is time for U.S.
    entities to be able to compete on equal footing with domestic
    suppliers.
            L  While the U.S. has been a leader of efforts to achieve a WTO
            agreement to make government procurement more open and
            transparent, at Doha WTO members put off beginning negotiations
            on this topic until the fall 2003 Cancun Ministerial. We look
            forward to even more leadership from USTR and Congress in
            pursuing a WTO agreement.
            L  NEMA also urges the Bush Administration to increase efforts
            to obtain full implementation and enforcement of all
            signatories to the 1999 OECD Anti-Bribery Convention and the
            1997 OAS Convention on Corruption.

    An End to Section 201 Tariffs on Foreign Steel Inputs

         LAn End to Section 201 Steel Tariffs: NEMA strongly
    opposes the tariffs on foreign steel products imposed by the President
    last year, and is working to see them eliminated as soon as possible.
    Most of our members are steel consumers, and these duties serve to
    threaten a very large number of jobs in our industry. (In this respect,
    NEMA believes the Administration's initiative to bring together global
    steel producers under the auspices of the Organization for Economic
    Cooperation and Development [OECD] should receive international
    support.) We are keeping our members fully updated on developments
    related to the exemptions process and applaud those exemptions that
    have already been granted.

    Help member Companies Benefit from the Emergence of China as a WTO
    member

         LChina: NEMA members continue to be intensely interested
    in the Chinese market, lobbying hard in recent years for the U.S. to
    grant permanent MFN/NTR status pending Beijing's entry into the WTO.
    Our industry's sales to China have been growing rapidly over the last
    decade, now exceeding exports to all but a handful of countries. We are
    excited about future possibilities as the Middle Kingdom's economy
    continues to expand impressively--though our members' products continue
    to face a variety of tariff and non-tariff barriers.
            L  In this respect, while Beijing committed upon entering the
            WTO to change its conformity assessment procedures so as to
            accord non-Chinese product ``national treatment,'' for many
            electrical products it has also recently made erroneous moves
            to only accept goods built according to either Chinese national
            standards or those ``international'' standards developed and
            published by the International Electrotechnical Commission
            (IEC) and International Standards Organization (ISO). (ISO and
            IEC standards still frequently do not include products built to
            North America-based international requirements.) Up to now, the
            Chinese have also frequently accepted ``North American'' items
            that are compliant with the National Electrical Code (NEC).
            L  Like many other sectors, the U.S. electrical industry also
            continues to have fundamental, ongoing concerns about
            intellectual property protection in the People's Republic. Our
            members continue to be victimized by vast and repeated
            trademark infringement abuse. NEMA seeks continued
            strengthening of China's anti-counterfeiting measures and
            enforcement.

    Minimize European Union Penalties on Electrical Goods Stemming from the
    FSC/

    ETI Dispute and Other Issues

         LForeign Sales Corporation/Extraterritorial Income (FSC/
    ETI) Dispute: The electrical industry strongly encourages Congress to
    enact an appropriate WTO-compliant reform to the FSC/ETI program. NEMA
    does not take a position on the form this revision should take, except
    that the revised law should not undermine the financial position of the
    U.S. electrical sector. The European Union has indicated no immediate
    plans to impose the tariff retaliation authorized by the WTO, but the
    fact that the EU is moving into a position to implement sanctions
    inherently raises the stakes. A wide swath of our product scope is
    threatened with retaliation that would run into the millions of dollars
    and likely price our members' goods out of the market. It is worth
    noting that we have enjoyed very good working relations with European
    electrical industry counterparts on this matter, since their members
    have little interest in seeing the many U.S.-source inputs they use
    become more expensive or unavailable.
         LSuspension of the Electrical Safety Annex of the U.S.-EU
    MRA: NEMA is pleased that the EU Commission has moved to suspend
    implementation of the Annex, since our feeling is that it adds no value
    to the existing electrical safety systems in the U.S. and EU. The
    historical record of electrical safety, based on a private-sector-
    promulgated standards and conformity assessment system, is a good
    indicator that private-sector approaches are successful. The U.S.
    Occupational Safety and Health Administration (OSHA) NRTL (Nationally
    Recognized Testing Lab) Regulations call for OSHA accreditation of
    conformity assessment bodies (CABs). EU CABs can be accredited by OSHA
    for testing and certifying EU products to U.S. voluntary standards for
    OSHA recognition in the workplace. In 2001, OSHA granted NRTL-status to
    a German lab and thereby demonstrated the integrity of its approach, in
    which EU applicant CABs are given the same consideration as U.S. CABs.
    The Bush Administration should continue to maintain this OSHA NRTL
    independence while working with the EU to achieve better understanding
    of the U.S. position.

    Build on 2002 U.S.-EU Principles of Regulatory Cooperation to Address
    Various Eu-

    ropean Regulatory Proposals such as Those Relating to Chemicals and
    End-use-

    Equipment (EuE)

         LRegulatory Cooperation: NEMA applauds the Bush
    Administration and the European Union for their 2002 agreement on
    Guidelines on Regulatory Cooperation and Transparency. We ask that
    pilot projects adopted for implementation of the Guidelines include the
    current EU regulatory initiatives relating to Chemicals, End-Use-
    Equipment (EuE) and Restriction of Hazardous Substances (ROHS). For
    reasons elaborated in the previous paragraph, we do not think that
    electrical safety is an appropriate pilot project.
            L  As we and other industry associations noted in a June 2001
            paper for U.S. Trade Representative Robert Zoellick, and as
            noted in greater detail below, the EU is increasingly
            establishing regulations that are not justified by available
            technical evidence and by sound science and whose cost is not
            proportionate to intended consumer or environmental benefits.
            Typically, these regulations are developed with procedures that
            are not transparent to all stakeholders, including the U.S.
            electrical manufacturing industry and other trading partners.
            Further, stakeholders find they have no way to hold EU
            authorities accountable for the regulations produced. In short,
            EU legislation does not always meet the requirements of the WTO
            Agreement on Technical Barriers to Trade.
            L  Our industry is committed to working with the
            Administration, through engagement with the EU on questions of
            governance and regulatory disciplines, to find solutions to its
            systemic regulatory problems, ensuring justification,
            transparency and openness in development of directives,
            decisions and regulations, as well as ``national treatment''
            and accountability in their application.
         LProposed EU Directives Relating to Chemicals and End-use-
    Equipment (EuE): Brussels will continue work on these two proposals in
    2003. The Chemicals Directive as envisioned would have wide-ranging
    reporting implications for downstream users such as the electrical
    industry. The End-use-Equipment directive, an earlier version of which
    was known as the Electrical and Electronic Equipment (EEE) directive,
    would mandate eco-friendly design and require manufacturers to comply
    with a series of requirements throughout the life-cycle of a product.
    The planned EuE and its envisioned implementing measures would feature
    product energy efficiency requirements, a concept NEMA has supported in
    proposed U.S. energy legislation.
            L  We very much would like to avoid a repeat of 2002, during
            which the EU completed two new directives that create
            difficulties for U.S. electrical and electronics products by
            raising costs and allowing differing standards and procedures
            among the 15 member states. The first directive addresses take-
            back and recycling of Waste Electrical and Electronic Equipment
            (WEEE) while the second, known as the ROHS (Restriction on the
            Use of Hazardous Substances) directive, imposes bans on the use
            of certain substances currently used in manufacturing without
            providing sufficient basis for processes to identify any needed
            substitutes.
            L  NEMA urges the Bush Administration and Congress to clearly
            identify these four measures as serious potential trade
            barriers and to seek an accommodation that would emphasize
            rational, cooperative and science-based measures as
            alternatives to broad-brush regulatory mandates.
         LEU Initiatives Regarding Electromagnetic Fields (EMF): In
    1999, the EU Council issued a Recommendationthat set EMF exposure
    limits for the general public over a range of frequencies. Although it
    has been acknowledged by some supporters that the limits include an
    excessive safety factor, EU member states may provide for a ``higher
    level of protection'' than in the Recommendations, and thus can adopt
    more strict exposure limits. Extensive U.S. Government research on
    extra low frequencies (ELF) has concluded that ``the scientific
    evidence suggesting that ELF/EMF exposures poses any health risk is
    weak.'' Similar conclusions have been reached by health risk studies in
    other countries.
            L  A series of emerging EU initiatives also lacking sufficient
            justification pose additional EMF-related challenges to our
            industry: the aforementioned EuE proposal, a forthcoming
            proposal to regulate EMF exposure in the workplace only, and
            the ongoing revision of a safety directive for low voltage
            equipment (known as the LVD). Each of these will likely draw on
            the same excessive limits used in the Recommendation.
            L  Manufacturers on both sides of the Atlantic have warned
            their authorities through the TABD process that EMF could
            become a major point of contention between the U.S. and Europe.
            NEMA has notified the Commerce Department that EU member state
            implementation of the EU Council EMF recommendations would
            create a substantial barrier to trade by restricting the free
            movement of goods, which would severely affect U.S. electrical
            manufacturing interests. In the face of political pressures to
            adopt EMF regulations, NEMA believes that standards for human
            exposure to ELF-EMF are only warranted if a credible scientific
            basis can be established for adverse effects. NEMA supports the
            TABD position that EMF exposure standards must be harmonized
            globally. The U.S. government must continue its efforts to work
            with the leaders in the EU Commission and in the member states
            to avoid another trans-Atlantic trade dispute over a sensitive
            issue.

    Ensure that Prospective and Current WTO members Comply with
    International

    Agreements Relating to Technical Barriers

         LWTO Accessions: NEMA also hopes for greater progress in
    bilateral negotiations with WTO accession candidates. Particularly with
    regards to Russia, NEMA hopes that standards and TBT fundamentals are
    not sacrificed for the sake of geopolitical expediency. In the case of
    Saudi Arabia, NEMA appreciates and urges continuing emphasis on
    standards and TBT issues in the ongoing negotiations. NEMA
    representatives have traveled to Riyadh and established an effective
    cooperative relationship with Saudi Arabian Standards Organization
    (SASO) officials. A former NEMA employee now serves in place as the
    U.S. standards attache in Riyadh.
         LWTO Technical Barriers to Trade (TBT) Agreement: NEMA
    supports the concepts outlined in the WTO TBT Agreement and believes
    that all countries should implement, to the fullest extent, the
    obligations outlined there. These obligations include: standards
    development processes that are transparent and include participants
    from all interested parties; a conformity assessment system that
    upholds the principles of most-favored nation treatment (meaning equal
    treatment in all countries); and national treatment (meaning equal
    treatment of domestic and foreign products, as well as test
    laboratories conducting conformity assessment services) in the
    application of testing and certification procedures.

    Resist Efforts to Give Supplier's Declaration of Conformity Legal
    Standing at the Ex-

    pense of Third-Party Certification

         LLet The Market Decide: NEMA strongly believes that market
    conditions should determine the appropriate means of certifying that a
    product conforms with safety requirements, be it Third-Party
    Certification or Supplier's Declaration of Conformity (SDOC). In this
    respect, efforts to give SDOC legal standing should be resisted and
    kept in perspective, since such moves could have significant
    repercussions for the existing, successful U.S. electrical safety
    system--the latter being largely set up along Third Party lines.

    Ensure that NAFTA Parties Comply with Their Commitments

         LNAFTA Implementation Issues: NEMA member sales to Mexico
    have boomed since the inception of the NAFTA, and most remaining
    Mexican tariffs on U.S. electrical products have reached zero in 2003.
    Also, with an office in Mexico City, NEMA is well positioned to work
    with U.S. authorities to monitor and influence the Mexican standards
    development process for electrical products, ensuring that Mexican
    norms do not act as barriers to U.S. products.
            L  In this respect, NEMA is becoming very involved in the
            standards and conformity assessment processes in Mexico. The
            country is developing 20 to 30 new national electrical product
            standards (known as NOMs) each year and is moving in the
            direction of making all of its standards mandatory. The
            authorities do accept and take into account public comments on
            proposed standards; however, a document that has been
            substantially revised based on public comments may not be
            circulated for final public review prior to publication as a
            mandatory standard. Moreover, a standard adopted as mandatory
            can incorporate by reference another voluntary standard without
            any public review or comment opportunity. NEMA would welcome
            the Mexican standards authority's application of consistent and
            transparent procedures in the consideration and adoption of NOM
            standards, which directly affect market access for many proven
            commercial products.
            L  Mexico was required under its NAFTA obligations starting
            January 1, 1998, to recognize conformity assessment bodies in
            the U.S. and Canada under terms no less favorable than those
            applied to Mexican conformity assessment bodies. However, so
            far no U.S. or Canadian conformity assessment bodies have been
            recognized by Mexico for conducting conformity assessment on
            most products that are exported from the U.S. and Canada to
            Mexico. Mexico has indicated that it is willing to conform to
            these obligations only when the Government of Mexico determines
            that there is additional capacity needed in conformity
            assessment services. This procedure does not meet the intent of
            Mexico's NAFTA obligations, serving to protect their conformity
            assessment bodies and Mexican manufacturers from fair
            competition from U.S. and Canadian exports into Mexico.

    Continue Technical Exchanges with APEC Standards Officials

         LAPEC Standards: NEMA is actively involved in bringing a
    greater understanding of conformity assessment alternative processes to
    the Asia-Pacific region. We have been presenters at two meetings of
    APEC's Sub-Committee on Standards and Conformity Assessment, and we
    have so far collaborated with the National Institute of Standards and
    Technology on two workshops for APEC member country representatives.

    Revise ``Buy America'' Procurement Regulations in Line with
    International Commer-

    cial Realities

         L``Buy America'' Procurement Regulations: U.S. government
    ``Buy America'' restrictions on non-sensitive electrical products
    should be re-evaluated in the context of both the increasingly global
    economy and potential savings. By restricting access to the U.S.
    market, these restrictions also have the reciprocal effect of
    disadvantaging U.S. companies seeking to sell into foreign markets. The
    United States should consider entering into bilateral and regional
    agreements providing reciprocal access to government procurement in
    countries that are not members of the WTO Government Procurement
    Agreement.

    Secure Adequate USG Resources for Negotiations, Monitoring, Enforcement
    and

    Overseas Presence

         LMonitoring, Enforcement and Overseas Presence: NEMA
    applauds the Administration and Congress for their successful efforts
    to bring China and Taiwan into the WTO. NEMA welcomes the opportunity
    to help our member companies take advantage of the market-opening entry
    of China and Taiwan into the rules-based international trading system
    and is working with USTR, the Commerce Department, and Congress to
    monitor and ensure compliance.
            L  The U.S. Government needs to do more than simply reach
            favorable trade accords; it also needs to be vigilant in making
            sure that other countries live up to their commitments to
            foster openness, transparency and competition. In this regard,
            our view is that the Commerce Department's Standards Attache
            program should be expanded and fully funded. Likewise, we
            greatly appreciate the assistance provided by Foreign
            Commercial Service (FCS) offices abroad, and hope that FCS
            activities will receive ample support in FY 2004 and the years
            ahead.
            L  With the support of a Market Development Cooperator Program
            (MDCP) grant from the Commerce Department, NEMA opened offices
            in Sao Paolo, Brazil and Mexico City, Mexico in 2000. The MDCP
            is an innovative public/private partnership whose grant budget
            should be expanded so that more organizations can enjoy its
            benefits. NEMA looks forward to continuing its close
            cooperation with the Commerce Dept. on this project.
            L  Similarly, the Bush Administration and the 108th Congress
            should approve a generous increase in funding and staff for the
            U.S. Trade Representative's Office, allowing it to even more
            effectively negotiate, monitor and enforce trade agreements.

    Economic Sanctions

         LReform: NEMA supports passage of legislation that would
    establish a more deliberative and disciplined framework for
    consideration and imposition of economic sanctions by Congress and the
    Executive Branch. In addition, existing economic sanctions should be
    reviewed to determine if their effectiveness justifies the costs to
    U.S. jobs and industries.

    About NEMA:

        The National Electrical Manufacturers Association is the largest
    trade association representing the interests of U.S. electrical
    industry manufacturers. Its mission is to improve the competitiveness
    of member companies by providing high quality services that impact
    positively on standards, government regulation and market economics.
    Founded in 1926 and headquartered in Rosslyn, Virginia, its more than
    400 member companies manufacture products used in the generation,
    transmission, distribution, control, and use of electricity. These
    products, by and large unregulated, are used in utility, industrial,
    commercial, institutional and residential installations. Through the
    years, electrical products built to standards that both have and
    continue to achieve international acceptance have effectively served
    the U.S. electrical infrastructure and maintained domestic electrical
    safety. The Association's Medical Products Division represents
    manufacturers of medical diagnostic imaging equipment including MRT, C-
    T, x-ray, ultrasound and nuclear products. NEMA members' annual
    shipments exceed $100 billion in value.

           2003 Trade Priorities for the Administration and Congress

        Highlights

         LWorldwide tariff elimination for all NEMA products
         LNegotiate and ratify free trade agreements (bilateral,
    regional and multilateral) that further open commerce in electrical
    goods while upholding NEMA principles (see below right)
         LAn end to Section 201 tariffs on foreign steel inputs
         LHelp member companies benefit from the emergence of China
    as a WTO member
         LMinimize European Union penalties on electrical goods
    stemming from the FSC/ETI dispute and other issues.
         LBuild on 2002 U.S.-EU Principles of Regulatory
    Cooperation to address various European regulatory proposals such as
    those relating to chemicals and end-use-equipment (EuE)
         LEnsure that prospective WTO members such as Russia and
    Saudi Arabia comply with existing international agreements relating to
    technical barriers
         LResist efforts to give Supplier's Declaration of
    Conformity legal standing at the expense of Third-Party Certification
         LEnsure that all parties to the NAFTA comply with their
    commitments
         LContinue technical exchanges with APEC standards
    officials
         LRevise ``Buy America'' procurement regulations in line
    with international commercial realities
         LSecure adequate USG resources for negotiations,
    monitoring, enforcement and overseas presence
         LReform economic sanctions

    NEMA Principles for FTAs

         LImmediate Tariff Elimination
         LNo Mutual Recognition Agreements (MRAs) For Non-
    Federally-Regulated Products
         LEnergy Services Liberalization
         LOpenness and Transparency in Government Procurement
         LProtection of Intellectual Property Rights
         LReduction in Technical Barriers to Trade (TBTs) and
    Compliance with all World Trade Organization (WTO) TBT Agreement
    Requirements
         LInclusive Definition of ``International Standards''
         LVoluntary, Market-Driven Standards and Conformity
    Assessment
         LEffective Monitoring and Enforcement Mechanisms
         LFree Trade Benefits Not Encumbered By Labor Or
    Environmental Provisions
         LAs Many Other Market Opening Measures As Possible

        NEMA is the largest trade association representing the interests of
    U.S. electrical industry manufacturers, whose worldwide annual sales of
    electrical products total $122.5 billion. Its mission is to improve the
    competitiveness of member companies by providing high quality services
    that impact positively on standards, government regulation and market
    economics. Our more than 400 member companies manufacture products used
    in the generation, transmission, distribution, control, and use of
    electricity. These products, by and large unregulated, are used in
    utility, industrial, commercial, institutional and residential
    installations. The Association's Medical Products Division represents
    manufacturers of medical diagnostic imaging equipment including MRI, C-
    T, x-ray, ultrasound and nuclear products.

                                                Preis, Kraft & Roy, PLC
                                           New Orleans, Louisiana 70130
                                                         March 12, 2003
    U.S. House of Representatives Committee on Ways & Means
    1102 Longworth House Office Building
    Washington, D.C.20515

    RE: Written Comments Concerning the Hearing on President Bush's Trade
    Agenda

        We hereby file these comments for the printed record in response to
    the above referenced hearing. We strongly urge that the U.S.
    negotiating objective, during negotiations for the Central American
    Free Trade Agreement, the Free Trade Area of the Americas and future
    trade agreements, be for the inclusion of full drawback rights for U.S.
    manufacturers and exporters, pursuant to the duty drawback program as
    established under 19 U.S.C. 1313, in each free trade agreement
    (``FTA''). FTAs should not restrict, limit or otherwise eliminate
    drawback for U.S. manufacturers and exporters when exporting to U.S.
    FTA member countries. These comments describe in detail and with
    specificity the position taken on the above issue with supporting
    evidence provided herein.\1\
    ---------------------------------------------------------------------------
        \1\ These comments are submitted on behalf of Danzas/AEI Drawback
    Services, Inc., 1718 Fry Road, Suite 240, Houston, Texas, 77084, which
    company is a drawback service provider to U.S. manufacturers, producers
    and exporters. Similar comments were filed by Danzas/AEI Drawback
    Services, Inc., in response to the following: Request for Public
    Comments on the Second Draft Consolidated Texts of the Free Trade Area
    of the Americas Agreement, 67 Federal Register 79232-79234 (December
    27, 2002); Request for Comments and Notice of Public Hearing Concerning
    Proposed United States-Australia Free Trade Agreement, 67 Federal
    Register 76431-76433 (December 12, 2002); Request for Comments and
    Notice of Public Hearing Concerning Proposed United States-Central
    America Free Trade Agreement, 67 F.R. 63954, 63955 (October 16, 2002);
    and, Request by USTR on February 27, 2002 to Industry Sector Advisory
    Committees regarding the United States-Chile FTA negotiating objectives
    as they specifically relate to the duty drawback program. Such comments
    also were submitted to the U.S. Senate Committee on Finance,
    Subcommittee on International Trade, and the U.S. House of
    Representatives Committee on Ways and Means, Subcommittee on Trade.

    I. The U.S. Must Support the Inclusion of Full Duty Drawback Rights for
    ---------------------------------------------------------------------------
    U.S. Companies in FTAs

        Drawback restrictive language in FTAs must be removed in favor of
    text that has no limitations or restrictions on drawback. Until all
    tariffs into the U.S. are eliminated, U.S. exporters and manufacturers
    require and should be granted every possible advantage to not only
    compete on a level-playing field against their foreign competitors, but
    to win in the global market.
        The American Association of Importers and Exporters in its
    September 2002 statement to the Trade Policy Staff Committee, when
    commenting on the FTAA, best described how drawback should be treated
    in FTA negotiations:

            LThe FTAA should not repeat those arbitrary restrictions [of
            NAFTA], but rather should allow each country to maintain its
            own duty drawback program that has proven effective in
            encouraging manufacturing, expanding exports and increasing
            profitability. The simplest way to do this is to ignore this
            subject completely in the FTAA, thereby allowing each member
            country the freedom to continue its own duty drawback program
            that has proven its value for that country. Unrestricted
            drawback and free trade are designed to operate side-by-side.
            To impose arbitrary restrictions on duty drawback is
            antithetical to the concept of free trade itself. Let's keep it
            simple and allow each member country the unrestricted freedom
            to use its own duty drawback program to its fullest extent.\2\
    ---------------------------------------------------------------------------
        \2\ See Attached STATEMENT OF THE AMERICAN ASSOCIATION OF EXPORTERS
    AND IMPORTERS TO THE TRADE POLICY STAFF COMMITTEE SEPTEMBER 9, 2002,
    MARKET ACCESS IN THE FREE TRADE AREA OF THE AMERICAS.

        Our major trading partners with whom we have FTAs, such as Mexico
    and Chile, have started negotiations on drawback with the premise that
    full drawback rights should be included within the FTA. Clearly, these
    countries recognize the significant benefits that drawback provides to
    domestic manufacturers and exporters even when exporting goods to
    trading partners with whom they have entered into FTAs. The U.S. should
    adopt this position dur-

    ing FTA negotiations. Restrictive drawback programs would cause harm to
    our U.S. exporters.\3\
    ---------------------------------------------------------------------------
        \3\ The U.S. currently has FTAs with Canada and Mexico (two of its
    three largest trading partners), Chile, Singapore, Israel, Jordan, and
    sub-Saharan Africa. With respect to the proposed FTAs with Central
    America, Australia, Philippines, Taiwan, and Egypt, as well as the
    FTAA, we request that the U.S. negotiating objective be for the
    inclusion of full drawback rights.

    II. Inclusion of Full Drawback Rights in FTAs Will Provide Significant
    ---------------------------------------------------------------------------
    Benefits to U.S. Companies

        The inclusion of full drawback rights in FTAs would be of great
    benefit to U.S. companies that rely in large part on foreign inputs to
    manufacture or produce finished goods. Many foreign imports are subject
    to Most Favored Nation (``MFN'') duty rates when imported into the U.S.
    for inclusion in the manufacturing process. Eliminating or restricting
    drawback in future FTAs as in NAFTA or the U.S.-Chile FTA would place
    U.S. companies at a significant competitive disadvantage against other
    trading partners that export to the Americas.
        NAFTA-like, or any other, restrictions on export-conditioned duty
    drawback and deferral programs do not best serve U.S. interests. In
    fact, the potential opportunity costs of extending such restrictions in
    future FTAs for U.S.-based firms significantly outweighs the possible
    benefits of disciplines on the activities of producers in Australia. In
    sum, the U.S.-proposed NAFTA-like restrictions do not best represent
    U.S. interests, particularly those of the U.S. manufacturing, refining
    and exporting communities.\4\
    ---------------------------------------------------------------------------
        \4\ The drawback limitations agreed to in the U.S.-Chile FTA are
    positive only insofar as the limitations: (1) are phased in over a
    twelve-year rather than a briefer period; and, (2) include NAFTA
    Article 303.6 exceptions relating to same condition substitution
    drawback. If all U.S. MFN rates are not reduced to zero by the year
    2012, at which time the Chile FTA drawback limitations take full
    effect, the drawback restrictions within the Chile FTA will become
    detrimental to many U.S. manufacturers and exporters that require
    drawback to remain competitive when exporting to Chile. In fact, the
    recent Communication from the United States to the WTO Negotiating
    Group on Market Access states that the U.S. proposes that all tariffs
    be eliminated by 2015. See Market Access for Non-Agricultural Products,
    TN/MA/W/18 (5 December 2002).
    ---------------------------------------------------------------------------
        For example, if drawback were allowed to Canada and Mexico today,
    U.S. manufacturers and exporters (``U.S. companies'') would be more
    competitive when making sales in those markets. First, many MFN rates
    are still in place and U.S. manufacturers often require foreign imports
    (non-originating NAFTA goods) to manufacture finished products that are
    exported to our NAFTA trading partners. Second, many situations exist
    today in which Canada's or Mexico's MFN rate is duty-free for product
    categories; therefore, a NAFTA duty preference does not distinguish
    U.S. from other non-NAFTA imports. Yet, drawback for U.S. companies is
    restricted under NAFTA.
        Consequently, the purpose of the NAFTA duty deferral program and
    the benefits it provides to U.S. (or originating) goods is defeated. As
    our NAFTA partners' lower MFN rates on an accelerated basis to provide
    other countries' exporters with the same or similar market access that
    the NAFTA grants to U.S. companies, U.S exporters become less
    competitive in exports. This situation would apply to any FTA entered
    into by the U.S. in which NAFTA-type drawback restrictions exist. In
    either of these situations, the incremental benefit at the margin that
    drawback provides to U.S. manufacturers and exporters means the
    difference between making a sale, and thus competing in the importing
    country's market.
        Duty drawback reduces production and operating costs by allowing
    manufacturers and exporters to recover duties that were paid on
    imported materials when the same or similar materials are exported
    either whole or as a component part of a finished product. This
    advantage must be maintained as part of U.S. policy to foster growth
    and development within the U.S. and increase U.S. export
    competitiveness abroad.

    III. Drawback Encourages Growth in U.S. Manufacturing and Exports

        Drawback is the refund of U.S. Customs (``Customs'') duties,
    certain Internal Revenue taxes, and certain fees that are lawfully
    collected at importation.\5\ Customs administers the refund after the
    exportation or destruction of either the imported or a substituted
    product, or the article manufactured from the imported or substituted
    product.\6\ The establishment of the duty drawback program, and U.S.
    policy underlying the program, is to increase the competitiveness of
    U.S. industry in the global market when competing against lower-priced
    exports from our trading partners. In sum, the drawback program
    benefits U.S. manufacturers and exporters by increasing their
    competitiveness either at the margin for pricing goods in the export
    market or through lower overall costs of production.\7\
    ---------------------------------------------------------------------------
        \5\ See http://www.customs.USTreas.gov/impoexpo/impoexpo.htm.
        \6\ See Id.
        \7\ See Supra Note 4. It is of interest that the World Trade
    Organization (``WTO'') has commented that the effects of drawback
    programs in other countries create an export incentive, counteract the
    negative effects of high import tariffs, create a strong magnet for
    export-oriented foreign direct investment, benefit exporters and
    manufacturers, and remove a bottleneck to private sector development.
    ---------------------------------------------------------------------------
        The drawback program also was initiated to create jobs and
    encourage manufacturing and exports.\8\ Customs recognizes this by
    stating that
    ---------------------------------------------------------------------------
        \8\ See Supra Note 4. The Continental Congress first established
    drawback in 1789, and it was initially limited to specific articles,
    such as salt used to cure meats, that were directly imported and
    exported. Since that time, drawback has been expanded to include
    numerous products as U.S. production and manufacturing has grown in
    different industrial sectors.

          LThe rationale for drawback has always been to encourage American
    commerce or manufacturing, or both. It permits the American
    manufacturer to compete in foreign markets without the handicap of
    including in his costs, and consequently in his sales price, the duty
    paid on imported merchandise.\9\
    ---------------------------------------------------------------------------
        \9\ See Id.

        The intent of Congress is to grant drawback when and wherever
    possible to the benefit of U.S. companies. The purpose of both FTAs and
    the drawback program is to provide the greatest overall benefits to
    U.S. exporters. To limit drawback in the context of FTAs would thus
    ---------------------------------------------------------------------------
    defeat the purpose of both FTAs and the drawback program.

    IV. The Rationale for Restricting Drawback Rights in FTAs No Longer
    Exists

        The U.S. policy, or rationale, for restricting drawback rights in
    FTAs no longer exists, and no empirical evidence has surfaced that
    would lead us to believe otherwise. There were three primary reasons
    for restricting drawback in a FTA, all of which have been proven false.
    First, the U.S. believed that drawback restrictions were necessary to
    create a disincentive for the development of export platforms. Yet,
    such restrictions have had an effect adverse to that intended. Second,
    the U.S. has said that drawback is an export subsidy that should be
    eliminated. Drawback is not an export subsidy. Third, the U.S. has
    stated the removal of tariff barriers through FTAs eliminate U.S.
    companies need for drawback. This is false because drawback continues
    to make a significant difference at the margin when exporting to FTA
    partners that have low or zero MFN duty rates.
        The above stated rationale for restricting drawback are not viable
    and are inconsistent with the overall policy of the U.S. government,
    which is to encourage U.S. exports with our trading partners. The
    removal of WTO approved export promotion programs such as the drawback
    program simply decreases what would otherwise be an enhanced
    competitive advantage that U.S. companies would have under a FTA. The
    U.S. historically, and before NAFTA, had FTAs with Jordan and Israel
    with no restrictions on drawback. It is our understanding that the U.S.
    negotiating objective for drawback, along with many other objectives,
    in this and future FTAs is based upon the NAFTA. However, the rationale
    developed for the inclusion of drawback restrictions within the NAFTA
    and thus within FTAs is no longer viable, as addressed in detail below.

              LA. Restricting Drawback Encourages, Rather than Discourages,
            the Creation of an Export Platform

        The continued proliferation of free trade agreements makes the U.S.
    position on export platforms a moot point, with no empirical evidence
    to substantiate the premise. The U.S. position in NAFTA was to
    eliminate duty drawback and thus create a disincentive for the
    establishment of export platforms in Mexico or Canada by Asian and
    European countries, to the detriment of U.S. suppliers of imports and
    manufacturers. This position was developed a decade ago, when the U.S.
    had very few FTAs, and was based in large part on theoretical
    assumptions.\10\
    ---------------------------------------------------------------------------
        \10\ It was also alleged that not limiting or restricting the duty
    drawback program in the context of a FTA creates an incentive to move
    manufacturing out of the U.S., but there has been no empirical data
    compiled to prove this theory. In addition, the government's
    ``manufacturing relocation incentive'' is greatly diminished when the
    country with which we have the FTA is not a border country. The U.S.
    has the lowest tariff burdens in the world. Thus, the presumption that
    companies would relocate to save duties would have been proven by now.
    ---------------------------------------------------------------------------
        Over time and with the imposition of NAFTA Article 303 drawback
    restrictions our NAFTA trading partners have instituted trade policies
    that diminish the financial impact on domestic manufacturers of the
    duty-deferral mechanism and drawback restrictions contained in the
    NAFTA. The U.S. has done nothing to counter the same adverse impacts on
    U.S. manufacturers and exporters. For example, in anticipation of the
    adverse economic impact on its maquiladoras that Article 303 would
    have, Mexico instituted its Sectoral Promotion Programs (``PPS'').\11\
    Under the PPS, Mexico reduced many of its Normal Trade Relation
    (``NTR'') duty rates in order that domestic manufacturers could obtain
    non-NAFTA inputs, primarily from Japan and Korea, as drawback to the
    U.S. became restricted. In addition, Canada reduced its NTR duty rates
    in order that the imposition of the drawback restrictions under NAFTA
    had the least adverse economic impact upon domestic manufacturers when
    exporting to the U.S. These actions not only circumvent the original
    intent of drawback restrictions as relates to the creation of an export
    platform, but also demonstrate that the premise is fallible. If
    drawback restrictions are included in other FTAs, our trading partners
    will likely take similar actions to ensure that their domestic
    companies can obtain the necessary inputs at the lowest possible cost
    rather than obtain them from the U.S. Thus, the analysis for the need
    to restrict duty drawback based on the creation of export platforms has
    proven false over time.
    ---------------------------------------------------------------------------
        \11\ See Attached U.S. International Trade Commission, Industry
    Trade and Technology Review, Integration of Manufacturing, Regulatory
    Changes in Mexico Affecting U.S.-Affiliated Assembly Operations,
    Publication 3443 (July 2001).

              LB. Duty Drawback is Not an Export Subsidy, and It Creates
            Incentives and Advantages for Domestic Manufacturers and
    ---------------------------------------------------------------------------
            Exporters

        Almost every country has a drawback program. Duty drawback is one
    of the few GATT/WTO sanctioned programs that, as commented by the WTO
    about the effects of drawback programs in other countries, has the
    following positive effects: Creates an export incentive; Counteracts
    the negative effects of high import tariffs; Establishes a strong
    magnet for export-oriented foreign direct investment; Provides benefits
    to exporters and manufacturers; and, Removes a bottleneck to private
    sector development.
        According to the WTO, as well as the intention of Congress and over
    200 years of experience, duty drawback promotes, encourages and
    benefits exports. Increased trade through FTAs does not reduce jobs in
    the U.S., but rather moves them to those industries that export.
    Workers in exporting industries have greater productivity and higher
    wages than do workers in other industries. Export promotion programs
    such as drawback are necessary to encourage exports and enhance U.S.
    competitiveness abroad.

              LC. It Is Illogical for the U.S. Government to Remove Export
            Incentives for U.S. Manufacturers and Exporters

        The U.S. should not remove WTO legal export incentives for U.S.
    companies, but rather provide any additional incentives and competitive
    advantages to U.S. companies that would allow them to win contracts for
    the sale of goods and services abroad.\12\
    ---------------------------------------------------------------------------
        \12\ Other U.S. programs exist that provide export incentives for
    U.S. companies, such as the USDA's Dairy Export Incentive Program
    (``DEIP''), Export Enhancement Program, and the Market Access Program.
    Although it is currently under attack by other WTO member countries,
    the U.S. continues its attempt to resolve the disputes surrounding the
    Foreign Sales Corporation (``FSC'') program in a manner having the
    least adverse effect on U.S. entities.
    ---------------------------------------------------------------------------
        The U.S. strategy for entering into FTAs is to lower the overall
    tariff burden for U.S. companies when exporting to the particular
    trading partner, thereby making U.S. companies more competitive in that
    market or region. However, as in the case of Mexico and Canada, when
    countries lower their own NTR duty rates to rates that match the level
    contained in a free trade agreement with the U.S., any drawback
    limitations become punitive to U.S. companies. The advantage provided
    to the U.S. companies by the FTA diminishes when foreign exporters
    receive the same or similar benefits (plus drawback, in many
    instances). The result is a decrease in the competitiveness of U.S.
    companies. The intent of the duty deferral program is to ensure that
    exporters would obtain duty-free entry for originating goods.
        For example, when U.S. goods enter Canada or Mexico free of duty
    without NAFTA origination because the NTR duty rate is zero, there is
    no benefit accruing to the U.S. export due to the restrictive nature of
    NAFTA's duty-deferral program. Drawback restrictions are not contingent
    upon NAFTA origination and thus apply to any exports--whether
    originating or non-originating goods. Thus, any goods exported from the
    U.S. that do not receive the benefits intended under NAFTA are denied
    any drawback benefit when competing against foreign goods subject to a
    zero MFN rate of duty. This places U.S. companies at a significant
    competitive disadvantage compared to foreign companies when the
    importing country has a FTA with the U.S. and a FTA with other
    countries in which drawback is retained, i.e., the Chile-E.U. FTA. In
    addition, this competitive disadvantage increases when the importing
    member has a zero rate of duty for the product categories in which U.S.
    exports compete against third country exports.

    V. NAFTA Article 303 Created Many Problems Associated With the Drawback
    Restrictions Imposed on U.S. Companies

        Drawback restrictive provisions in future FTAs will pose the same
    or similar problems created by Article 303 of NAFTA. Article 303 of
    NAFTA created significant problems in both the interpretation of the
    NAFTA drawback restrictions by Customs, leading to the inability of
    many U.S. companies to obtain drawback on necessary foreign inputs.

              LA. Customs Misinterpreted the Application of Article 303 of
            NAFTA in Regard to Same Condition/Unused Merchandise,
            Substitution Drawback

        The exclusion of the Article 303-type language will alleviate the
    problems associated with Customs' interpretation of Article 303 as it
    relates to same condition/unused merchandise, substitution drawback. In
    interpreting Article 303, Customs improperly eliminated same condition,
    substitution drawback in all instances, even where the only
    substitution that takes place is foreign for foreign merchandise. If
    the above issue is not properly addressed within FTAs, then U.S.
    exporters will likely face the same obstacles and problems as they face
    with NAFTA Article 303.

            1. Article 303(2)(d) of NAFTA and Customs Interpretation

        Article 303(2)(d) of NAFTA prevents a party from refunding
    ``customs duties paid or owed on a good imported into the territory and
    substituted by an identical or similar good that is subsequently
    exported to the territory of another [p]arty.'' However, 303(6)(b)
    specifically states that Article 303 (and the substitution prohibition)
    does not apply to ``a good exported to the territory of another [p]arty
    in the same condition as when imported into the territory of the
    [p]arty from which the good was exported processes such as testing,
    cleaning, repacking or inspecting the good or preserving it in its same
    condition, shall not be considered to change a good's condition.''
    Where same condition goods have been commingled with fungible goods,
    the treaty provides that origin may be determined using one of the
    inventory accounting methods in Schedule X to the treaty. Where there
    is 100% foreign product, there is no need to perform an origin
    determination and the exported good should be excepted from Article 303
    all together. 19 U.S.C. Section 1313(j)(4) and 3333(a) recognize the
    interplay of this language and make it clear that substitution is still
    available for exports of same condition goods.
        NAFTA negotiators were apparently concerned that a claimant
    exporting NAFTA-eligible goods could claim drawback on the NAFTA-
    eligible shipment by substituting those goods with commercially
    interchangeable goods that were previously imported. Thus, the claimant
    would receive the benefit of NAFTA and drawback at the same time.
    Attached is a copy of U.S. Customs Headquarters Ruling No. 228209,
    dated April 12, 2002 that is the best statement by Customs to date as
    to how the agency has interpreted Article 303 in relation to unused
    merchandise, same substitution drawback. Essentially, Customs has taken
    the position that an export using substitution does not qualify as a
    ``same condition'' good (and, thus, is not excepted from Article 303)
    because the exported item is not the actual item that was imported. Of
    course, this presents a result in which an exporter of 100% foreign
    goods is prevented from claiming drawback, contrary to NAFTA.

               2. Recommend Changes to Article 303(2)(d) of NAFTA

        If Article 303 or similar language is included in FTAs, which we
    oppose, it is extremely important to ensure that the treaty text itself
    provides clarifying language to address the problem described above.
    Based on the information below, we would be pleased to provide proposed
    changes in language to Article 303 of NAFTA as it relates to same
    condition/unused merchandise, substitution drawback. Any proposed
    language should clarify NAFTA Article 303(2)(d) by making at least two
    changes to the implementing laws.
        First, the treaty text must state that a party is only prohibited
    from refunding duties on imported goods substituted with originating,
    identical or similar goods that are then exported to the trading
    partner. Thus, a party should not be prohibited from refunding duties
    where the export is of non-originating goods. If a company has 100%
    foreign goods, there is never an issue as to whether export is
    originating. If the company does commingle originating and non-
    originating goods, it must first use an acceptable inventory accounting
    method to determine origin, and then it can use substitution drawback
    only for those shipments deemed non-originating.
        Second, any Article 303(6)(b)-type language referring to same
    condition exports must be changed to address the use of the term ``same
    condition,'' as a term used under the old drawback law, versus ``unused
    merchandise,'' as a term used by Customs today. ``Same condition'' was
    changed to ``unused merchandise'' under the Customs Modernization Act
    (``Mod Act''). Unfortunately, because the Mod Act and NAFTA were
    developed at the same time, the NAFTA text did not include the term
    ``unused merchandise'' and instead, uses the archaic term ``same
    condition.'' This causes confusion and complexity under the drawback
    law. In addition, Customs eliminated the term ``same condition'' in the
    U.S. drawback law because it did not adequately define this type of
    drawback, creating ambiguity where certain products were not subject to
    drawback. Accordingly, Article 303(6)(b)-type language of NAFTA must be
    revised to bring it in line with current drawback terminology.\13\
    ---------------------------------------------------------------------------
        \13\ We also recommend that this issue be corrected under NAFTA as
    it is currently implemented and administered.

              LB. Article 303 Drawback Restrictions Increases Production
    ---------------------------------------------------------------------------
            Costs for Certain U.S. Industry Sectors

        Certain industry sectors within the U.S. cannot claim drawback
    under NAFTA although they must import and pay duty on inputs that they
    cannot obtain in the U.S. The result is that many U.S. entities are
    disadvantaged when competing against foreign competitors in importing
    countries' market. This situation is commonplace in U.S. petroleum
    refining. These same drawback restrictions, if extended in FTAs, will
    continue to place our petroleum refiners at a competitive disadvantage
    compared to foreign refiners.
        Many petroleum refiners will continue to pay MFN duty rates for
    inputs even as the U.S. enters into FTAs. The cost competitiveness of
    U.S. refiners in the global market depends on each additional
    incremental advantage that can be obtained. U.S. petroleum refiners use
    a combination of foreign and domestic feedstock in order to meet
    domestic petroleum derivative production needs. U.S. petroleum refiners
    pay Most Favored Nation (``MFN'') duty rates importing into the U.S.
    because they import a large portion of feedstock from foreign sources
    other than Mexico and Canada. Our refiners therefore face increased
    costs in the form of duties not subject to drawback due to NAFTA
    Article 303. This often makes U.S. refiners' product noncompetitive in
    the North American market relative to finished product imported
    directly into North America from non-NAFTA sources. To remain as
    competitive as possible when competing for sales of refined product
    exported by foreign producers to our FTA partners, eligibility for
    drawback is a necessary part of decreasing costs of production to win
    sales and contracts.\14\
    ---------------------------------------------------------------------------
        \14\ It is important to note that the NAFTA and U.S. Rules of
    Origin compound this problem by restricting the ability of U.S.
    petroleum refiners to claim a NAFTA duty preference for their exports.
    For example, molecules of crude oil cannot be traced through the
    refining process (unlike the use of parts for the manufacture of goods)
    to determine whether NAFTA crude or foreign crude was the input for the
    final product. The use of NAFTA crude as the input establishes whether
    the petroleum product is of NAFTA origin. Thus, it is all but
    impossible to establish through the NAFTA rules of origin that the
    final product is a NAFTA originating good under 19 U.S.C. Sec. 3332
    that is eligible for NAFTA preferences upon export. Additionally,
    petroleum FTZs are prohibited from using the NAFTA origin rules to
    establish that non-originating goods undergo a tariff shift that would
    classify the final product as a NAFTA good under 19 U.S.C. Sec. 3332
    (a)(2). Finally, FTZ accounting methods for petroleum refiners also
    prohibit or greatly restrict NAFTA duty deferral benefits when
    exporting from the U.S.
    ---------------------------------------------------------------------------
        Any extension of Article 303-type language to FTAs would continue
    the prejudice against U.S. petroleum refiners and exporters created by
    NAFTA.\15\
    ---------------------------------------------------------------------------
        \15\ Based on the discussion set forth in V.B. above, we recommend
    that merchandise within Chapter 27 of the Harmonized Tariff Schedule of
    United States (``HTSUS'') be exempt from any limitations on drawback in
    FTAs. Precedent already exists in Article 303, Paragraph 6, and Annex
    303.6 of NAFTA for not subjecting goods to drawback restrictions in
    FTAs entered into by the U.S. The exemption of petroleum products under
    Chapter 27 of the HTSUS from drawback limitations is necessary due to
    constraints placed on petroleum exports and benefits derived from FTAs
    under current U.S. law.
        Recommended language for such an exemption is as follows, ``An
    imported good used as a material in the production of, or substituted
    by an identical or similar good used as a material in the production
    of, a good provided for in Harmonized Tariff Schedule of the United
    States Chapter 27, that is subsequently exported to the territory of
    another Party.'' We would be pleased to discuss this matter with the
    TPSC, upon request.
        Other U.S. companies are placed in a similar situation insofar as
    they pay duty on necessary foreign inputs. Thus, exemptions from
    drawback limitations for products in Chapters 84, 85 and 90, which
    products often involve assembling a large number of foreign components
    in the United States, would be beneficial to those manufacturers
    competing against our trading partners in regions or countries in which
    we have entered into FTAs. This includes assembly operations for
    computers and other high technology equipment. The intent is to grant
    full drawback rights to refiners and exporters of petroleum products,
    similar to those exemptions provided for in NAFTA Article 303.

    ---------------------------------------------------------------------------
        VI. A Possible Alternative to Full Drawback Rights

        If the U.S. will not pursue the inclusion of full drawback rights
    in FTAs, at minimum, a FTA provision on drawback should include the
    Chile-E.U. FTA language on drawback, not the U.S.-Chile FTA drawback
    language that eliminates drawback after the FTA is in force for twelve
    years. Attached is a copy of the Chile-E.U. language, Final Text,
    11.06.02, Annex III, Title IV, Drawback or Exemption, Article 14,
    Prohibition of drawback of, or exemption from, customs duties. The
    language of the Chile-E.U. FTA would provide significant benefits to
    U.S. manufacturers and exporters, increasing their competitive
    advantage when making sales in the Americas. First, the Chile-E.U. FTA
    has no limitations on unused merchandise drawback and thus does away
    with the problems associated with unused merchandise drawback that has
    resulted from NAFTA Article 303. Second, as all countries begin to
    reduce their MFN rates after a new round of GATT negotiations, there
    will be situations where companies will not claim originating status
    under the treaty and thus drawback will benefit our exporters. Thus,
    companies will pay a smaller MFN rate when exporting within the
    Americas and file for drawback on high value/high duty rate imports,
    allowing them to be more competitive in making sales against E.U. and
    Asian exporters.
        We do recommend a slight change in the language of the Chile-E.U.
    FTA regarding Paragraphs 1 and 3. These Paragraphs do not discuss the
    situation when proof of origin is not issued for an exported good, and
    the language must address the situation of when no proof of origin is
    issued. For example, the following sentence should be included in
    Paragraph 2, which sentence would state that

            L``The prohibition in paragraph 1 shall not apply when a proof
            of origin is not issued.''

        With this change, Paragraph 1 would limit drawback rights only if a
    proof of origin is issued. If proof of origin is not issued, the treaty
    prohibition does not apply and each country is free to provide full
    drawback rights pursuant to that country's program. Further, acceptance
    of the Chile-E.U. provision should be clear in stating that there is no
    additional limitation for unused merchandise drawback.

        VII. Conclusion

        If U.S. trade policy is to identify and provide mechanisms with
    which to pursue greater market access for U.S. exports of goods and
    services,\16\ then drawback should not be restricted in FTAs. Drawback
    comports with U.S. trade policy in a number of areas, including export
    promotion, export growth and increased productivity and development in
    U.S. manufacturing and refining operations. The inclusion of a full and
    unrestricted drawback right in FTAs will strengthen U.S.
    competitiveness and productivity.
    ---------------------------------------------------------------------------
        \16\ See NAFTA Sec. 108. Congressional Intent Regarding Future
    Accessions.
    ---------------------------------------------------------------------------
        Please do not hesitate to contact the undersigned by telephone at
    504-581-6062 or by email at mhebert@pkrlaw.com if you have any
    questions or would like additional information concerning the comments
    herein. Thank you.
                Respectfully submitted,
                                                   Marc C. Hebert, Esq.
    Attachments

    STATEMENT OF THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS TO THE
                          TRADE POLICY STAFF COMMITTEE

                               SEPTEMBER 9, 2002

              MARKET ACCESS IN THE FREE TRADE AREA OF THE AMERICAS

        The American Association of Exporters and Importers (AAEI) is
    pleased to offer its comments on a proposed Free Trade Agreement of the
    Americas (FTAA), and we thank the Office of the U.S. Trade
    Representative and the members of the Trade Policy Staff Committee for
    providing us with this opportunity.
        Negotiation of a trade agreement tying together the many and
    diverse nations of the New World is an undertaking of extraordinary
    scope and complexity. It is all the more important, therefore, to
    remain focused on a few goals that will best assure the success of a
    FTAA.

    (1) Commit to a Genuine Effort to Remove Trade Barriers

        The conventional objective of any free trade agreement is, of
    course, to eliminate direct tariffs and quantitative restrictions
    (quotas) on trade in goods. High tariffs and quotas not only restrain
    wealth-generating trade among nations, they also commonly distort the
    domestic economies of nations by perpetuating industrial and
    agricultural inefficiency. Any country's tariff peaks are invariably
    reliable indicators of its least competitive industrial or agricultural
    activities.
        AAEI members compete globally in a wide variety of economic
    sectors, but we shall not use this opportunity to catalog the specific
    areas in which we would hope to obtain early elimination of other
    countries' tariffs and quotas, although you will hear more about this
    from us in the future. Rather, we shall here state our strong support
    for a readiness to offer our own high tariffs, including those embodied
    in tariff-rate quotas, for reciprocal elimination.
        Beyond elimination of high tariffs, they should be prepared to
    accept some modification of the strong pro-petitioner bias in our
    unfair trade remedies regime. Being in favor of ``free but fair'' trade
    requires that both issues be addressed in a meaningful fashion. The
    United States has been on the losing side of most recent WTO challenges
    to its antidumping and countervailing duty determinations, for many
    reasons, including dumping calculation methodologies and subsidy
    presumptions, which are highly prejudicial to foreign exporters.
    Therefore, the United States must be willing to engage in negotiations
    to correct these procedural deficiencies, as circumscribed in WTO panel
    decisions. Otherwise, many commodities in which our FTAA partners are
    most competitive may be locked out of free trade area benefits by a
    perennial barrier of ``unfair trade'' allegations that neutralize the
    hemispheric advantages of the agreement.
        We fully comprehend that removal of protectionist barriers is
    widely perceived to be politically difficult, but removal will
    strengthen the competitiveness of companies that depend on imported
    materials, reduce living costs for American consumers, and reduce
    pressures for foreign and international assistance as the economies of
    our trading partners improve. We urge our negotiators to use the FTAA
    as an opportunity to dismantle our own protectionist regimes.

    (2) Keep It Simple

        It is a gross misconception to believe that regional free trade can
    be achieved simply by eliminating tariffs. Because free trade in the
    context of a regional trade agreement is necessarily conditional, the
    cost of complying with the conditions replaces the cost of tariffs as
    the measure of the extent to which trade is actually ``free''. If
    governments lose sight of this fact they will accomplish nothing
    meaningful in terms of stimulating trade with a FTAA, because only
    those very large companies with the resources, organizational systems,
    and full access to upstream cost accounting records will be able to
    take advantage of the FTAA, and the growth will not come to the small-
    and mid-sized businesses that are the backbone of any economy.
        We reiterate a point that AAEI made in our memorandum to you of
    June 11, 2001: the North American Free Trade Agreement (NAFTA) rules of
    preference for trade in goods are immensely complex and have limited
    the benefits that could have been obtained from the NAFTA. One Canadian
    study concluded that the ``tendency to trade'' of Canadian businesses
    is twelve times greater east-west than north-south, over almost any
    distance. Because the NAFTA has comprehensively eliminated duties, the
    study's conclusion indicates that other factors are restraining north-
    south trade. Those factors almost certainly relate to the complexity of
    the NAFTA's preference rules, complexity that should be avoided in a
    FTAA.
        Specifically, governments should seek to limit to the extent
    possible the use of regional value content as a criterion for
    preferential treatment. In general, value content rules under the NAFTA
    have been extremely onerous for traders. They rival the most arcane and
    prolix sections of the tax code in complexity. The FTAA is unlikely to
    reach its full potential for success if similar cumbersome value
    content rules are adopted in the FTAA. Therefore, AAEI urges the USTR
    to work towards an agreement based on more straightforward tariff shift
    rules.
        There are reasons for rejection of the value content criterion in a
    FTAA other than the burden it imposes on traders:

         LIt is highly unstable because of its sensitivity to
    fluctuations in currency exchange rates. In fact, the month before the
    NAFTA went into effect, Mexico devalued its peso from approximately
    three to the U.S. dollar to five to a dollar, upsetting at the last
    moment plans made for qualifying goods for preference under the NAFTA.
    In June of this year, after the Government of Uruguay announced that it
    would allow the peso to float against the U.S. dollar, the Uruguayan
    peso dropped by nearly 20 percent in a few hours. The Argentine peso
    has lost more than 70 percent of its value since it was freed from a
    one-to-one exchange rate with the dollar in January. Exchange swings of
    this magnitude significantly affect value content calculations,
    upsetting the terms of contracts between parties in different countries
    and invalidating compliance assessments performed by government
    agencies.
         LIt is also unstable because of its sensitivity to
    fluctuations in the world price of key commodities, such as oil, animal
    hides, sugar, coffee, all produced in quantity within the hemisphere.
         LThere can be a lack of reciprocity of results. If an
    article with a certain value is processed in one country with low costs
    for labor, energy, and capital the value added by processing may not
    qualify the finished good for preference, whereas the same processing
    performed on the same article in another country with higher costs may
    meet the value content standard.
         LRegional value content rules can actually operate as a
    disincentive to improved productivity. A producer of goods who narrowly
    qualifies for preference under a value content criterion may be
    reluctant to make process improvements that could reduce local costs.
         LFinally, regional value content claims are difficult for
    customs administrations to verify because they can be examined only by
    trained auditors acquainted with the accounting rules of the country in
    which a producer is located, and an examination can require weeks of
    effort. This is a strain both on governments and on the companies that
    are subject to audits, which must tie up records and key personnel
    while the audit is ongoing.

        Tariff shift rules, on the other hand, can in many cases be
    verified by persons who know nothing about accounting and only the
    basic rules of tariff nomenclature and classification. The
    participating countries will be able to verify preference qualification
    without extended delays or the variations of personal judgment. This
    simplicity makes it possible for even those countries with very modest
    resources to undertake a reasonable level of verification, while
    verification of a regional value content standard is within the means
    of only the most affluent Administrations that can afford to send
    auditors abroad for weeks on end.
        Another area that calls for simplicity is that of duty drawback.
    Virtually each of the countries involved in the FTAA has its own
    existing duty drawback program, the rationale for which is to encourage
    commerce and/or manufacturing. Duty drawback permits companies in each
    of the FTAA countries to compete in foreign markets without the
    handicap of including in their costs, and consequently in their sales
    prices, the duty paid on imported merchandise. Stated more positively,
    duty drawback adds profitability to those companies and countries that
    export their goods.
        NAFTA imposed arbitrary restrictions on the drawback programs of
    each of the member countries, with the unfortunate result of reducing
    companies' profitability. The FTAA should not repeat those arbitrary
    restrictions, but rather should allow each country to maintain its own
    duty drawback program that has proven effective in encouraging
    manufacturing, expanding exports and increasing profitability. The
    simplest way to do this is to ignore this subject completely in the
    FTAA, thereby allowing each member country the freedom to continue its
    own duty drawback program that has proven its value for that country.
    Unrestricted drawback and free trade are designed to operate side-by-
    side. To impose arbitrary restrictions on duty drawback is antithetical
    to the concept of free trade itself. Let's keep it simple and allow
    each member country the unrestricted freedom to use its own duty
    drawback program to its fullest extent.

        (3) Keep Your Eyes on the Prize

        A hemispheric free trade agreement is an opportunity not only to
    stimulate trade and economic growth but also to solidify commercial and
    political models that serve the long-term interests of the people of
    the hemisphere. These are extremely important outcomes that have been
    objectives of diplomatic policy in our hemisphere for over half a
    century. But this opportunity will be fully realized only if
    governments can resist their characteristic reaction to trade
    agreements as benefiting only tax cheats and unscrupulous traders.
        It is beyond dispute that governments have a right to prevent tax
    fraud, and that they are entitled to deal with it aggressively. But
    setting up draconian consequences for clerical errors, reasonable
    mistakes of fact or misinterpretations of law, or even simple
    negligence creates a chilling effect that may significantly reduce use
    of the FTAA to expand trade, particularly if a trader's exposure to
    liability is dependent on the comprehension of a foreign exporter.
        To employ an analogy, the benefits of replacing an old road with a
    new multi-lane superhighway will be minimal if police seize the
    opportunity to line the new road with speed traps from end to end.
    Similarly, if traders see the FTAA operating as a grand law enforcement
    sting the enormous potential benefits of the FTAA, including the
    revenue windfalls governments could enjoy as a result of expanded
    trade, will be put in jeopardy.
        Governments should not let the possibility that small amounts of
    revenue may slip from their grasp cause them to lose sight of the real
    prize: the enormous economic growth and political stabilization that
    will result from a heavily-used free trade agreement.

        (4) Use the FTAA To Begin To Build A Zone of Confidence

        A free trade agreement will function most efficiently and deliver
    the greatest benefits if goods are able to flow freely throughout the
    free trade area with minimal cost and delay at national borders. Border
    delays are likely to be exacerbated as trade volumes expand more
    rapidly than the resources of government border regulatory agencies.
    This divergence of workload and resources makes it necessary for
    governments to re-think their approaches to functions such as trade
    documentation, enforcement of products standards, and cargo security.
        The key component of this new thinking is a willingness of FTAA
    governments to work together to create an environment in which goods
    arriving from a trusted trading partner will ordinarily not require new
    documentation and physical inspection because the necessary
    documentation and verification of compliance with standards has
    occurred in the country of production. In other words, the FTAA should
    aim to build a zone of confidence in which, based on shared
    responsibility and mutual trust, interruption of trade at the border of
    an importing country is the exception, not the norm.
        Trade Documentation and Certifications. Building this zone of
    confidence can begin with trade documentation generally and preference
    certifications specifically. In any modern economy, import
    documentation is almost invariably a restatement of information
    provided to importers by foreign exporters. Customs officials worldwide
    acknowledge that it is impractical to expect importers to open freight
    containers at ports of arrival and verify the contents prior to filing
    import documents. Governments continue to demand trade documents from
    importers not because they are the best sources of information but
    because they can be held accountable and, it is believed, exporters
    cannot.
        The NAFTA began to depart from this model by placing primary
    responsibility for certifying eligibility of goods for preference on
    producers and exporters, tacitly acknowledging the futility of placing
    that responsibility on importers. The FTAA governments can expand on it
    by allowing basic export documentation, filed under penalty of law in
    the exporting country, to be used with the endorsement of importers as
    the import clearance information in the country of import. Such an
    arrangement would not only reduce the need for redundant filing it
    would also allow customs administrations concerned about import fraud
    and/or cargo security to obtain the same information filed in the
    exporting country. This will enhance the complementary law enforcement
    efforts of the trading partners.
        A similar approach may help USTR to deal with the issue of
    government or business chamber endorsements of export certificates.
    Many of the countries that are potential participants in a FTAA
    currently participate in trade agreements under which exporters'
    certificates are required to be endorsed by a government agency or a
    business chamber. The United States, in its trade agreements, has not
    followed this practice for several reasons. Our experience is that the
    endorsements are of minimal value, they are too frequently occasions
    for extraction of petty bribes, and a challenge to a claim for
    preference endorsed by a foreign government agency could become a
    diplomatic incident (seen as questioning the integrity of another
    government) rather than a routine act of revenue enforcement.
    Additionally, there is no entity in the United States that is prepared
    to offer reciprocal endorsement services.
        However, these endorsement arrangements are deeply entrenched in
    the business cultures of many countries, in large part because of the
    revenues they generate for the endorsing agents. One option for
    retaining them in a way that would add real value is to allow private
    business chambers to guarantee the integrity of certificates executed
    by exporters from their countries. This guarantee would be in the form
    of a commitment to indemnify any importer in another FTAA country who
    is required to pay duties on merchandise because of a false or invalid
    exporter certification.
        This would be a marked improvement over the NAFTA, which generally
    allows an importer who relies on an invalid NAFTA exporter certificate
    to avoid penalties but not regular duties. In a sense, the proposed
    guarantees would operate along the lines of surety bonds obtained by
    importers. An FTAA exporter would remain liable for compensating
    foreign customers injured by his invalid export certificates (under
    indemnification clauses typically in contracts); however, if an
    exporter is unable to pay compensation the guarantor (business chamber
    in the exporting country) would pay. Such an arrangement would preserve
    a traditional role (and revenues) for business chambers in South
    American countries, it would give real value to that role, and it would
    stimulate greater trade by allowing purchasers of goods exported from a
    FTAA country to do business with full confidence that they will not
    suffer financial harm as the result of false or invalid exporter
    certificates of eligibility for preference.
        Business Confidential Information. Another key to building a
    hemispheric zone of confidence is scrupulous handling by government
    agencies of business confidential information. Timely submission of
    data relating to movement of cargo is key to its efficient conveyance
    around the world. Traders acknowledge the needs of governments to
    document and review trade movement information for revenue collection,
    health and safety protection, effective and efficient port operations,
    and border security. However, businesses need from the governments to
    which they entrust this data a commitment to ensure its
    confidentiality. FTAA governments need to acknowledge and respect
    business concerns that this information should not be publicly shared.
    A commitment from governments to provide security for intangible assets
    such as business data is paramount for traders. Agreements with
    suppliers, partners, and business associates typically require that
    they abide by confidentiality agreements. Traders do not expect less of
    from the governments in the countries in which they operate.
        Product Standards. Finally, governments can add to a zone of
    confidence by improving cooperation on establishment and enforcement of
    product standards. It is unlikely that any government takes lightly its
    responsibility to protect the health and safety of its citizens, its
    agriculture, and its environment. But it is certain that no government
    wishes to lose privileged access to another country's market (certainly
    if that other market is the United States) by allowing exports of
    substandard products.
        There is an opportunity here for regulatory agencies to work with
    their counterparts in other countries to assure that regulated products
    traded among FTAA countries move with a guarantee that they meet
    mutually-recognized standards. The result will be reduced costs and
    delays as goods cross borders, a larger percentage of low or unknown-
    risk products in trade (and arriving at U.S. borders), and an
    opportunity for the regulatory agencies of the U.S. and other countries
    to perform their critical missions in a more effective manner that is
    less resource-intensive and time-sensitive than border enforcement.

    Summary

        For businesses in the or elsewhere, a decision to import materials
    or goods from another country or to seek markets in other countries is
    heavily influenced by supply chain costs. Direct duties on goods are
    only one of the costs that must be taken into consideration. Costs of
    recordkeeping, compliance with conditions for obtaining preferential
    treatment, border delays, certification requirements, a multiplicity of
    product standards and labeling requirements, the risk that goods
    certified as duty free by exporters will be determined by governments
    to be dutiable with no recourse for importers, all of these factors go
    into making the decision. A FTAA that accomplishes only elimination of
    duties addresses only one of the costs that a business must take into
    account. We urge USTR and the representatives of the other governments
    of the hemisphere to build a New World free trade area that goes well
    beyond mere elimination of duties, and that addresses all of the
    obstacles to free trade. AAEI looks forward to the opportunity to work
    with USTR as it moves forward on these issues and as it crafts and
    negotiates FTAA rules of origin that avoid the pitfalls and
    complexities that have come to be associated with NAFTA.
        Gracias.

                   U.S. International Trade Commission Publication 3443
                                           Integration of Manufacturing
    JULY 2001
    Industry Trade and Technology Review

        Regulatory Changes in Mexico Affecting U.S.-Affiliated Assembly
    Operations

                                                       By Ralph Watkins
              NAFTA Article 303 and Restrictions on Duty Drawback
        On October 30 and December 31, 2000, the Government of Mexico
    issued changes to the decrees governing the Maquiladora and PITEX
    programs (published in the Diario Oficial),\27\ bringing Mexico into
    compliance with Article 303 of NAFTA, which restricted duty
    drawback\28\ for goods traded between Mexico and its NAFTA partners
    effective January 1, 2001. As a result, companies importing machinery
    and components originating from outside North America for use in
    assembly plants in Mexico began paying duties on such imports.
    ---------------------------------------------------------------------------
        \27\ For additional information on changes to the Maquiladora
    Decree, see Charles Bliel, ``Main Reforms to Sector Promotion, PITEX
    and Maquiladora Programs,'' in North American Free Trade & Investment
    Report, vol. 10, no. 21, Nov. 30, 2000, p. 7ff and Baker & McKenzie,
    ``Latest Amendments to the Maquiladora and PITEX Decrees,'' Client
    Bulletin 09/00. For example, terms for registering under the
    Maquiladora Program were liberalized to include companies whose annual
    export sales are greater than $500,000 or whose exports equal 10
    percent or more of its annual production. By 2000, the share of a
    company's annual production that had to be exported to maintain
    eligibility to operate under the Maquiladora Program was reduced to 15
    percent, from 100 percent prior to NAFTA. However, there were no value
    threshold requirements. In order to import machinery and equipment
    temporarily under the Maquiladora and PITEX Programs in 2001, a company
    must invoice exports equal to at least 10 percent of its total
    invoicing (maquiladoras) or make annual sales abroad equal to a minimum
    value of 30 percent of its annual sales (PITEX).
        \28\ Under drawback, duties on imported components used in the
    manufacture of products that are eventually exported could either be
    waived or refunded. The NAFTA parties restricted duty drawback to
    reduce the likelihood that one NAFTA party would be used by non-North
    American companies as an export platform for duty-free assess to other
    NAFTA parties.
    ---------------------------------------------------------------------------
        In compliance with Article 303, Mexico will reduce the duty owed to
    it on the importation of non-North American inputs by the lower amount
    collected by either Mexico or the other
        NAFTA party (table 1). That is, if the assembled product is
    exported to the United States and U.S. duties are higher than those
    calculated when the inputs entered Mexico, no duty will be owed to
    Mexico on the non-North American inputs. However, if the duties on the
    inputs in Mexico are higher, Mexico may or may not exempt any duties of
    its own, depending on the amount of duties collected by U.S. Customs on
    the assembled product. Duties owed to Mexico must be paid to Mexican
    Customs (Aduanas) within 60 days of export to the United States.\29\
    Mexican duties on non-North American inputs imported by companies not
    registered under either the Maquiladora or PITEX Programs are collected
    by Aduanas at the time of entry into Mexico.\30\
    ---------------------------------------------------------------------------
        \29\ Julia S. Padierna-Peralta, Changes in Mexico's Maquiladora
    Industry 2001: Sectoral Development Programs, Neville, Peterson &
    Williams, panel presentation at the U.S.-Mexico Chamber of Commerce,
    Nov. 14, 2000.
        \30\ Julia S. Padierna-Peralta and George W. Thompson,
    ``Maquiladoras and Mexico's Sectoral Programs in 2001,'' Neville,
    Peterson & Williams memorandum dated Dec. 2000.

    ------------------------------------------------------------------------
       Table 1  Illustrations of duty payment on non-North American inputs
             under NAFTA duty drawback restrictions  (U.S. dollars)
    -------------------------------------------------------------------------
                  Import      Import
                  duties      duties       Duties       Final
                payable to  payable to  exempted by    duties       Total
       Case     Mexico on     U.S. or   Mexico: the  payable to   amount of
                  ``X''      Canada on   lesser of     Mexico    duties paid
               inputs from   ``Y'' end    the two    (within 60  by exporter
                  Taiwan      product      values       days)
    ------------------------------------------------------------------------
    A          11           2           2            9           11
    B          5            6           5            0           6
    C          5            0           0            5           5
    ------------------------------------------------------------------------

    Source: Prepared by Julia Padierna-Peralta, Neville Peterson LLP
        (formerly Neville, Peterson & Williams) and reprinted with
        permission.

        The new regulations governing the Maquiladora and PITEX Programs
    allow companies registered under these programs to continue to import
    inputs for their assembly plants originating in the United States or
    Canada free of duty, even if the staged NAFTA rates for these inputs
    are not yet ``free.'' Inputs originating outside North America that are
    imported into Mexico's Maquiladora and PITEX sectors are not subject to
    duty on entry into Mexico because these imported components are
    eligible for duty-free treatment if the assembled product is exported
    to a country other than the United States or Canada. If the assembled
    good is exported to the United States, the higher of the U.S. or
    Mexican duty would apply.
                      Mexico's Sectoral Promotion Programs
        In anticipation of the restrictions on duty drawback, a number of
    companies with Maquiladora and PITEX operations have convinced
    suppliers in Asia and Europe to establish parts production facilities
    in North America to replace imports from non-NAFTA sources. Some have
    found or developed alternative suppliers in North America. Nonetheless,
    non-North American sources supplied 18 percent ($17.3 billion) of the
    imported inputs used by Maquiladora and PITEX companies in 2000, led by
    Japan (4 percent), Germany (3 percent), and Korea (3 percent) (table C-
    4).
        Maquiladora and PITEX operations that continued to rely on non-
    North American inputs expressed concern to the Ministry of the Economy
    \31\ that Article 303 of NAFTA would increase their costs to the point
    of making their goods noncompetitive in the North American market
    relative to finished goods imported directly into the United States and
    Canada from sources other than Mexico. Many also claimed that they
    could not find North American producers of certain parts required in
    their assembly operations.
    ---------------------------------------------------------------------------
        \31\ The Ministry of Trade and Industrial Development (SECOFI) was
    renamed the Ministry of the Economy in December 2000.
    ---------------------------------------------------------------------------
        To ease the burden emanating from the effects of Article 303 of
    NAFTA, the Ministry of the Economy established the Sectoral Promotion
    Programs (PPS), effective November 20, 2000, for exports from companies
    registered under the Maquiladora and PITEX Programs, and effective
    January 1, 2001, for products exported from all other companies.\32\
    The PPS unilaterally reduced Mexico's General Import Tariff (GIT) rate
    of duty for thousands of tariff rate lines in 22 industrial sectors.
    Import duty rates under the PPS on most qualifying inputs and capital
    equipment are either free or 5 percent, although a number of products
    have duty rates of 3, 7, or 25 percent.\33\ Most of the product
    categories for which rates were reduced under the PPS had previously
    been dutiable at rates that varied between 13 percent and 23 percent.
    Each ``Program'' sector lists certain qualifying end-products and
    inputs by tariff number. If the non-North American inputs are used to
    manufacture any of the end-products listed, the non-North American
    inputs may be imported at the import duty rate specified in the
    particular Program.\34\
    ---------------------------------------------------------------------------
        \32\ For an overview of the Sectoral Promotion Programs, see David
    Bond and Esther Moreno, ``SECOFI Publishes Automotive Sectoral Program
    and Modifies Electric and Electronic Program,'' North American Free
    Trade & Investment Report, Nov. 15, 2000, p. 8ff.
        \33\ Mexico has 10 free-trade agreements. Most components used by
    the maquiladora industry that are imported from Israel and 30 countries
    in Europe and the Western Hemisphere subject to these agreements
    currently are eligible to enter Mexico free of duty or at reduced
    tariffs. The temporary reduction or elimination of tariffs under the
    PPS primarily affects imports from Asia. See ``New Maquiladora Rules
    Leave Asia Out in the Cold, but Asian Firms Pin Hopes on Fox
    Administration,'' in Mexico Watch, Dec. 1, 2000, p. 9. Also, Padierna-
    Peralta, Neville Peterson LLP, telephone interview with USITC staff,
    July 11, 2001.
        \34\ Padierna-Peralta and Thompson, ``Maquiladoras.''
    ---------------------------------------------------------------------------
        The Mexican Ministry of the Economy based its list of articles
    eligible for reduced duties under the PPS on requests from the assembly
    industry and reaction from the domestic industry in Mexico.\35\ Critics
    of the PPS have expressed concern that it mitigates the impact of the
    restrictions on NAFTA duty drawback and may reduce the incentive for
    maquiladoras still importing parts from suppliers in Asia to find
    alternative sources in North America.
    ---------------------------------------------------------------------------
        \35\ For a brief overview of the operation of the PPS, see
    ``Sectoral Promotion Programs: Frequently Asked Questions,'' in Trade
    Commission of Mexico Newsletter, Mar. 2001, available at http://
    www.mexico-trade.com.
    ---------------------------------------------------------------------------
        Despite the reduction or elimination of Mexican tariffs under the
    PPS, maquiladoras using parts that are not of North American origin
    will be subject to the U.S. duty on the value of those imported parts
    contained in the assembled article when it enters the United States. If
    the U.S. rate of duty is lower than the PPS rate, the maquiladora must
    pay duties to Mexico's Aduanas calculated at the PPS rate minus duties
    paid to U.S. Customs.\36\ In addition, because a country's temporary
    duty relief, including the new PPS tariff reductions, are not bound at
    the World Trade Organization (WTO), the Government of Mexico can again
    raise duties (to the higher bound or intermediate rate) without
    violating WTO rules.\37\ According to an industry observer, a key
    feature of Mexico's Sectoral Promotion Programs is that they are policy
    instruments often subject to change; frequent revisions of existing
    programs should be expected.\38\ Domestic producers in Mexico can ask
    the Government to remove specific articles from the PPS, and industry
    observers suggest that the Ministry of the Economy is likely to remove
    articles from the PPS list if a request is made by a company that
    initiates production anywhere in North America.\39\ At the same time,
    manufacturing companies can seek the inclusion of their critical inputs
    in the Programs.\40\
    ---------------------------------------------------------------------------
        \36\ For many goods in the electronic and electrical products
    sector, which accounts for the majority of imports from Asia by
    companies operating under the Maquiladora and PITEX programs, the U.S.
    rates of duty were reduced to free under the multilateral Information
    Technology Agreement (ITA). Mexico is not a signatory to that
    agreement.
        \37\ David Bond and Esther Moreno, ``New Versions of the Electric,
    Electronic and Automotive Sectoral Promotion Programs Published,''
    North American Free Trade & Investment Report, Jan. 31, 2001, p. 4.
        \38\ Padierna-Peralta, Neville Peterson LLP, telephone interview
    with USITC staff, July 11, 2001.
        \39\ Bond and Moreno, ``SECOFI,'' p. 10.
        \40\ Padierna-Peralta, Neville Peterson LLP, telephone interview
    with USITC staff, July 11, 2001.
    ---------------------------------------------------------------------------
        Many maquiladora representatives from Japan, Korea, Taiwan, the
    United States, and Mexico reportedly have been unable to locate
    suitable component suppliers in North America. These officials claim
    that the PPS as currently constituted is inadequate to meet their
    competitive needs, and have requested Mexican officials to consider
    additional financial incentives. Without incentives to compensate for
    increased costs due to NAFTA Article 303, some companies currently
    using maquiladora operations reportedly will start searching for
    opportunities in other countries. For example, industry observers point
    to an assertion by the president of the Korean Maquiladoras of Baja
    California that Article 303 forces some maquiladoras to purchase raw
    materials from suppliers that do not meet required quality standards.
    However, Mexico's Economy Minister reportedly has encouraged the
    maquiladora industry and members of the Industry Chambers Confederation
    to design a program to develop suppliers for the industry.\41\
    ---------------------------------------------------------------------------
        \41\ David Bond and Paola Santos, ``Ministry of Finance Extends
    Rectification of Import Duties for PPS; Ministry of Economy Refuses to
    Modify NAFTA Article 303,'' North American Free Trade and Investment
    Report, June 15, 2001.
    ---------------------------------------------------------------------------
                              Maquiladora Taxation
        U.S. companies operating under Mexico's Maquiladora Program have
    expressed concerns about changes to Mexico's tax laws that went into
    effect on January 1, 2000, that reclassified many maquiladora
    operations as permanent establishments and could have resulted in
    double taxation.\42\ Mexican and U.S. tax authorities reached agreement
    on an ``Addendum to the United States-Mexico Competent Authority
    Agreement on the Maquiladora Industry'' that entered into force on
    August 3, 2000. The addendum provides for an indefinite extension of
    the previously agreed exemptions from Mexican asset tax and permanent
    establishment exposure for U.S. companies that use the processing
    services of a maquiladora. The initial agreement, signed in October
    1999, had established new standards for Mexico to impose in determining
    the income tax liability of a Mexican maquiladora company as a
    condition for maintaining the Mexican tax exemptions for the U.S.
    company.\43\ That agreement only provided for application of the
    specific standards through taxable year 2002, and created uncertainty
    for maquiladora operations which the Addendum announced in August 2000
    was intended to address. Some experts on Mexican tax law note that
    significant uncertainty still remains regarding the manner in which
    Mexico will implement the terms of the mutual agreement for 2000 and
    later years, and the industry awaits the outcome of talks between the
    United States and Mexico on this subject.\44\
    ---------------------------------------------------------------------------
        \42\ For background on U.S. industry concerns about maquiladora tax
    issues, see Larry Brookhart and Ralph Watkins, ``Production-Sharing
    Update: Developments in 1999,'' Industry Trade and Technology Review,
    USITC Publication 3335, July 2000, posted on USITC Internet server at
    www.usitc.gov (``publications'').
        \43\ For information on the addendum and remaining concerns, see
    John A. McLees and Jaime Gonzalez-Bendiksen, ``Maquiladora Tax Issues
    Need Careful Attention as Mexico Extends the Current Maquiladora Tax
    Regime Beyond 2002,'' Tax Notes International, Sept. 11, 2000, p. 1189.
        \44\ John A. McLees and Jaime Gonzalez-Bendiksen, ``Mexico Lags in
    Implementing Mutual Agreement on Maquiladora Taxation,'' Tax Notes
    International, May 7, 2001, p. 2371.
    ---------------------------------------------------------------------------
        Phase-In of Domestic Market Access for the Maquiladora Industry
        Mexico committed in NAFTA (Annex I for Mexico, p. I-M-34) to
    ``phase out'' the Maquiladora Program by each year increasing the share
    of its production that a maquiladora operation could sell to the
    domestic market in Mexico, until a maquiladora could sell 100 percent
    of its production domestically on January 1, 2001. Instead of being a
    ``phase out'' of the Maquiladora Program, the NAFTA provision appears
    to have resulted in further evolution of the maquiladora industry's
    access to the Mexican market. This provision facilitated
    intramaquiladora sales, which were not allowed prior to NAFTA. Further,
    the ability to sell to both the U.S. and Mexican markets attracted
    additional investment in the industry, particularly among parts
    producers and companies in the durable goods sector. Instead of the
    Maquiladora Program being phased out, employment in the maquiladora
    industry grew from 468,000 at the end of 1993 to 1.3 million in
    December 2000.\45\
    ---------------------------------------------------------------------------
        \45\ ``Maquiladora Scoreboard'' in Twin Plant News, June 1994 and
    July 2001.
    ---------------------------------------------------------------------------
        To comply with NAFTA, the Maquiladora Decree published in 1998
    ordered the termination of all restrictions regarding maquiladora sales
    to the domestic market as of January 1, 2001.\46\
    ---------------------------------------------------------------------------
        \46\ See article 16 of ``Mexico's Decree for the Development and
    Operation of the Maquiladora Industry for Exports,'' Diario Oficial,
    June 1, 1998.
    ---------------------------------------------------------------------------
        In order to maintain certification as a maquiladora operation and,
    therefore, be eligible for exemption from the value-added tax,\47\ a
    company's exports in the current year must be equivalent to at least 10
    percent of the value of its previous year's production.\48\ If a
    maquiladora is not involved in the manufacture of goods for export
    markets, then a U.S. company that owns machinery and equipment used in
    the maquiladora operation cannot claim eligibility for exemption from
    Mexican asset tax and from Mexican income tax applicable to permanent
    establishments; moreover, value-added tax applies on sales of finished
    products into the domestic market.\49\
    ---------------------------------------------------------------------------
        \47\ According to Padierna-Peralta (Neville Peterson LLP) and John
    McLees (Baker & McKenzie) in telephone interviews with USITC staff,
    July 11 and July 23, 2001, imports of components and materials entered
    under Mexico's Temporary Import Programs (Maquiladora and PITEX) are
    not subject to the value-added tax, but there are requirements for
    imposition of value-added tax on temporarily imported machinery and
    equipment if it is later determined to be a definitive import.
        \48\ Based upon an amendment to the Maquiladora Decree issued
    December 31, 2000. Bliel, ``Main Reforms,'' p. 7.
        \49\ John McLees, Baker & McKenzie, telephone interview with USITC
    staff, July 23, 2001.

    ---------------------------------------------------------------------------

                                                         April 12, 2002
    John S. Rode, Esq.
    Rode & Qualey
    55 West 39th St, 6th floor
    New York, NY 10018

        Re: 19 U.S.C. 1313(j)(2); 19 U.S.C. 1313(j)(4); 19 U.S.C. 3333(a);
    19 CFR 181.41; 19 CFR 181.42(d); NAFTA

    Dear Mr. Rode:

        This is in response to the ruling request submitted by your letter
    dated September 29, 1998, on behalf of Konica Business Technologies
    Inc. (``Konica''), in connection with Konica's claims for unused
    merchandise substitution drawback filed upon the exportation of certain
    office machines and related products to Canada, after January 1, 1994.

        FACTS:

        The following are the facts as described in your submission. Konica
    imports a variety of office machines, including electrostatic copying
    machines, accessories, and supplies therefor (referred to collectively
    as ``office products''), which Konica purchases from its parent company
    in Japan. The office products are manufactured in Japan, China,
    Thailand and the Philippines. After importation, the office products
    are placed in inventory at Konica, where they are held until sold and
    shipped to related and unrelated purchasers in the U.S., Canada,
    Mexico, and other countries.
        When imported, all Konica office products are marked with a model
    number, for example, ``Model 4040,'' which denotes the physical
    characteristics, specifications, and capabilities of that particular
    article. Konica in Japan assigns a ``PCUA number'' to each article,
    which is applied to the carton in which the article is packed for
    shipment to the U.S. When the article is received into inventory at
    Konica in the U.S., Konica enters the model number and PCUA number on
    their inventory records. All office products which bear the same PCUA
    number have identical model numbers.
        The PCUA numbers are used to distinguish between Konica products
    which bear the same model number, but which differ in certain other
    respects. For example, a Model 4040 copying machine imported by Konica
    from the manufacturer in Japan will bear one PCUA number on its carton
    when it is received in inventory at Konica. If that copying machine is
    placed in service upon rental, lease or sale to a customer, and is
    thereafter returned to inventory, it will be given a new PCUA number to
    distinguish that particular Model 4040 copying machine from others
    which have not been used. Similarly, a Model 4040 copying machine
    remanufactured by Konica after it has been in service, to restore that
    machine to its original factory specifications, will receive a new PCUA
    number when it is returned to inventory.
        In preparation of drawback claims, the following merchandise is
    excluded from consideration for drawback:

        1) all exported office products which bear a PCUA number which
    indicates they were not last imported into the U.S. by Konica, from the
    manufacturer in Japan, China, Thailand, or the Philippines;
        2) all exported office products with PCUA numbers which indicate a
    previous withdrawal from inventory at Konica, and rental, lease or sale
    to customers in the U.S., followed by return to Konica after having
    been removed from the unit cartons in which those articles were
    originally imported from Japan; and
        3) all office products having PCUA numbers which show that prior to
    exportation to Canada, they had been returned to Konica's inventory
    after remanufacture to restore them to original factory specifications.

        After the foregoing review, for the exported office products not
    excluded under the review, the import and inventory records at Konica
    are searched to determine whether, on the date of exportation to Canada
    of the exported articles identified through their PCUA numbers as being
    potentially eligible for drawback, Konica's inventory included an equal
    or greater quantity of commercially interchangeable machines, i.e.,
    products bearing the same model and PCUA numbers.
        If the import and inventory records do reflect the presence at
    Konica of the requisite quantity of commercially interchangeable
    articles as of the date of exportation, and show that such articles
    were imported less than three years before the date of exportation in
    question, Konica's employees select an import entry or entries upon
    which such articles were imported within the previous three year
    period. The corresponding quantity of commercially interchangeable
    articles imported on the entry or entries is then designated on the
    claim for drawback; the import and inventory records are then annotated
    to reflect the quantity designated on the drawback claim, and to
    indicate the remaining quantity, if any, which may be designated in the
    future.
        Konica was advised by Customs in Boston that drawback cannot be
    paid to Konica under 19 U.S.C. 1313(j)(2) upon exportation of office
    products to Canada, subsequent to January 1, 1994, the effective date
    of the implementation of the North American Free Trade Agreement
    (``NAFTA''). It is your understanding that the opinion of Customs in
    Boston is based on two conclusions: 1) because Konica's claims are
    based upon exports to Canada, payment is precluded by section 203 of
    the NAFTA Implementation Act, and 2) the claims in question cannot be
    paid because Konica does not employ any of the inventory methods
    described in Schedule X of the Appendix to Part 181 of the Customs
    Regulations.
        Comments on the foregoing were requested from Customs in Boston,
    and none were received, other than a reference to HQ 228446, dated July
    3, 2000.

        ISSUE:

        Whether under the facts described, the law provides for drawback
    under 19 U.S.C. 1313(j)(2), on exports to Canada.

        LAW AND ANALYSIS:

        Under 19 U.S.C. 1313(j)(1), drawback is authorized if imported
    merchandise on which was paid any duty, tax, or fee imposed under
    Federal law because of its importation is, within 3 years of the date
    of importation, exported or destroyed under Customs supervision and was
    not used in the United States before such exportation or destruction.
    Substitution of unused commercially interchangeable merchandise,
    subject to certain conditions, is authorized under 19 U.S.C.
    1313(j)(2), but 19 U.S.C. 1313(j)(4) limits that authorization.
        Under 19 U.S.C. 1313(j)(4):
        Effective upon the entry into force of the [NAFTA], the exportation
    to a NAFTA country . . . of merchandise that is fungible with and
    substituted for imported merchandise, other than merchandise described
    in paragraphs (1) through (8) of [19 U.S.C. 3333(a)], shall not
    constitute an exportation for purposes of [section 1313(j)(2)].
        In pertinent part, 19 U.S.C. 3333(a) provides:
        For purposes of this Act . . ., the term ``good subject to NAFTA
    drawback'' means any imported good other than the following:
        (2) A good exported to a NAFTA country in the same condition as
    when imported into the United States.
        Under 19 U.S.C. 3333(a), an imported good subsequently exported to
    a NAFTA country in the same condition as when imported, is not a ``good
    subject to NAFTA drawback''. Similarly, an imported good exported to a
    NAFTA country in the same condition as when imported, is merchandise
    described in paragraphs (1) through (8) of section 3333(a), therefore
    it is not merchandise other than the described merchandise, for
    purposes of 19 U.S.C. 1313(j)(4). Therefore, an exportation of a good
    to a NAFTA country in the same condition as when imported is not
    precluded from constituting an exportation for purposes of section
    1313(j)(2), under section 1313(j)(4). The limitation of section
    1313(j)(4) is applicable only to goods subject to NAFTA drawback.
        In this case, the good exported to Canada, is not the imported good
    upon which the drawback claim is based, but is the substituted good.
    The designated imported merchandise, which is not exported is the basis
    for the drawback claim. As it is not exported, it is not merchandise
    described in paragraph (2) of section 3333(a), which describes an
    exported good, and cannot be the basis for a claim under section
    1313(j)(2).
        This reading of the statutory limitation is supported by the
    legislative history to the NAFTA, with respect to 19 U.S.C. 1313(j)(2).
    The House Report states as follows:
        Subsection (c) eliminates, effective upon entry into force of the
    Agreement, ``same condition substitution drawback'' by amending section
    1313(j)(2) of the Tariff Act of 1930 (19 U.S.C. 1313(j)(2), thereby
    eliminating the right to a refund on the duties paid on a dutiable good
    upon shipment to Canada or Mexico of a substitute good, except for
    goods described in paragraphs one through eight of [19 U.S.C. 3333(a)].
        See House Report (Ways & Means Committee) No. 103-161(I), pp. 39-
    40, 103d Cong., 1st Sess. (1993 (reprinted at 1993 U.S.C.C.A.N. 2552,
    2589-2590). (Emphasis added). According to the legislative history,
    drawback under section 1313(j)(2), is not eliminated for imported goods
    described in paragraphs (1) through (8) of section 3333(a), which are
    also goods ``not subject to NAFTA drawback''. As the imported good was
    not exported, it is subject to NAFTA drawback.
        In your submission you refer to the potentially confusing double
    negative language in 19 U.S.C. 1313(j)(4)) and 3333(a)(2), and conclude
    that the mandate of the two provisions is as follows:
        `The exportation to a NAFTA country . . . of merchandise that is
    fungible with and substituted for imported merchandise . . . shall . .
    . constitute an exportation for purposes of paragraph (2) [of section
    1313(j)(2)]' if the exportation consists of `merchandise described in
    paragraphs (1) through (8) of section 3333(a) of this title.' Similarly
    it is evident that section 3333(a) effectively provides that an
    `imported good--[which is] exported to a NAFTA country in the same
    condition as when imported into the United States . . . ' is not a
    `good subject to NAFTA drawback.'
        We do not agree that the limitation in (j)(4) applies to the
    substituted merchandise which is not the basis of the drawback claim,
    but find that the limitation applies to the imported good which is the
    basis of the drawback claim.
        Given the admittedly confusing language of the statute, we turn to
    the NAFTA, to determine the intent of the statute. Customs construction
    is consistent with paragraph 2 of Article 303 of the NAFTA, which
    specifically provides:
        No Party may, on condition of export, refund, waive or reduce:
        (d) customs duties paid or owed on a good imported into its
    territory and substituted by an identical or similar good that is
    subsequently exported to the territory of another Party.
        Clearly, the NAFTA prohibits the refund of duties paid on imported
    merchandise on the basis of an exportation to Canada or Mexico of
    substituted identical or similar goods. Paragraph 6 of Article 303,
    describes the goods Article 303 does not apply to, and therein
    describes certain goods described in 3333(a), paragraphs (1) through
    (8), including:
        (b) a good exported to the territory of another Party in the same
    condition as when imported into the territory of the Party from which
    the good was exported (processes such as testing, cleaning, repacking
    or inspecting the good, or preserving it in its same condition, shall
    not be considered to change a good's condition). Except as provided in
    Annex 703.2, Section A, paragraph 12, where such a good has been
    commingled with fungible goods and exported in the same condition, its
    origin for purposes of this subparagraph may be determined on the basis
    of the inventory methods provided for in the Uniform regulations
    established under Article 511 (Uniform regulations);
        The imported merchandise which is the basis for drawback in this
    case, the office products, are not exported goods under subparagraph
    (b) above, therefore, Article 303 does apply to them, and the drawback
    for substituted merchandise is precluded under the NAFTA.
        The Customs Regulations implementing the NAFTA Implementation Act
    are found in 19 C.F.R. Part 181. Subpart E of Part 181 contains the
    regulations providing restrictions on drawback and duty-deferral
    programs. According to section 181.41, which is the first section in
    Subpart E:
        This subpart sets forth the provisions regarding drawback claims
    and duty-deferral programs under Article 303 of the NAFTA and applies
    to any good that is a ``good subject to NAFTA drawback'' within the
    meaning of 19 U.S.C. 3333. Except in the case of 181.42(d, the
    provisions of this subpart apply to goods which are imported into the
    United States and then subsequently exported from the United States to
    Canada on or after January 1, 1996, or to Mexico on or after January 1,
    2001.
        (Emphasis added). As the imported office machines, on which the
    drawback claim is based, are not goods exported to a NAFTA country in
    the same condition as when imported, they are a ``good subject to NAFTA
    drawback,'' and Subpart E is applicable to such good, and therefore the
    limitations therein are also applicable to such good.
        The pertinent limitation, implementing 19 U.S.C. (j)(4), is in
    Subpart E, 19 CFR 181.42, which provides for duties not subject to
    drawback:
        The following duties or fees which may be applicable to a good
    entered for consumption in the Customs territory of the United States
    are not subject to drawback under this subpart:
        (d) Customs duties paid or owed under unused merchandise
    substitution drawback under 19 U.S.C. 1313(j)(2) on goods exported to
    Canada or Mexico on or after January 1, 1994.
        The emphasized ``except'' in section 181.41, pertains to the dates
    as of which the limitations apply. Generally, subpart E applies to
    imported goods exported to Canada on or after January 1, 1996, and to
    imported goods exported to Mexico on or after January 1, 2001. However,
    section 181.42(d), applies to goods exported to Canada or Mexico on or
    after January 1, 1994.
        This position has been previously taken in Customs decisions. In HQ
    227272, dated May 1, 1997, 19 CFR 181.42(d) was cited as authority for
    the statement that ``[i]t is clear from the above provisions that, with
    the exceptions specifically provided for in 19 U.S.C. 3333(a)(1)
    through (8) (e.g., [goods not subject to NAFTA drawback]), substitution
    drawback under 19 U.S.C. 1313(j)(2) no longer exists for shipments to
    Canada or Mexico of merchandise imported into the United States.''
        Based on the foregoing analysis, we conclude that drawback under 19
    U.S.C. 1313(j)(2) may not be claimed for drawback on the basis of a
    good subject to NAFTA drawback, in this case an imported good for which
    a substituted good is exported to a NAFTA country, in the same
    condition as when imported. This conclusion is consistent with prior
    Headquarters decisions. In prior Headquarters decisions, Customs has
    addressed the limitation in 19 U.S.C. (j)(4). See HQ 227272, dated May
    1, 1997; HQ 227876, dated August 21, 2000; and HQ 229027, dated August
    13, 2001.
        In HQ 226541, dated July 24, 1998, this office stated in an
    information letter, that there can be no substitution unused
    merchandise drawback for commercially interchangeable merchandise of
    non-NAFTA origin exported to Mexico. One of the grounds for the
    conclusion was that paragraph 2(d) of Article 303 of the NAFTA
    expressly provides that no Party may, on condition of export, refund
    Customs duties paid on a good imported into its territory and
    substituted by an identical or similar good that is subsequently
    exported to the territory of another Party. As discussed above, Article
    303 applies to all merchandise unless it is exempted in paragraph 6 of
    Article 303. Paragraph 6 does not exempt the imported merchandise,
    which is not exported to a NAFTA country.
        As the substitution drawback of unused merchandise is not
    permissible with the goods described in this case, we do not need to
    address the issue of allowable inventory methods with respect to the
    specific merchandise at issue. The issue of the use of inventory
    methods described in Schedule X of the Appendix to Part 181 of the
    Customs Regulations, was addressed in HQ 227272, dated May 1, 1997, and
    HQ 227876, dated August 21, 2000 (copies enclosed).

        HOLDING:

        Under the facts described, the law does not provide for drawback
    under 19 U.S.C. 1313(j)(2), on exports of substituted goods to Canada,
    unless the imported goods on which the drawback claim is based are
    described in paragraphs (1) through (8) of 19 U.S.C. 3333(a).
                Sincerely,
                                                            John Durant
                                                   Director, Commercial
                                                       Rulings Division

                   CHILE-EUROPEAN UNION FREE TRADE AGREEMENT
                              FINAL TEXT, 11.06.02
                                   ANNEX III
                                    TITLE IV
                             DRAWBACK OR EXEMPTION
                                   Article 14
         Prohibition of drawback of, or exemption from, customs duties

            1. LNon-originating materials used in the manufacture of
            products originating in the Community or in Chile for which a
            proof of origin is issued or made out in accordance with the
            provisions of Title V shall not be subject in the Community or
            Chile to drawback of, or exemption from, customs duties of
            whatever kind.
            2. LThe prohibition in paragraph 1 shall apply to any
            arrangement for refund, remission or non-payment, partial or
            complete, and of customs duties, as defined in Article 59 of
            this Agreement, applicable in the Community or Chile to
            materials used in the manufacture, where such refund, remission
            or non-payment applies, expressly or in effect, when products
            obtained from the said materials are exported and not when they
            are retained for home use there.
            3. LThe exporter of products covered by a proof of origin shall
            be prepared to submit at any time, upon request from the
            customs authorities, all appropriate documents proving that no
            drawback has been obtained in respect of the non-originating
            materials used in the manufacture of the products concerned and
            that all customs duties applicable to such materials have
            actually been paid.
            4. LThe provisions of paragraphs 1 to 3 shall also apply in
            respect of packaging within the meaning of Article 7(2),
            accessories, spare parts and tools within the meaning of
            Article 8 and products in a set within the meaning of Article 9
            when such items are non-originating.
            5. LThe provisions of paragraphs 1 to 4 shall apply only in
            respect of materials, which are of a kind to which this
            Agreement applies. Furthermore, they shall not preclude the
            application of an export refund system for agricultural
            products, applicable upon export in accordance with the
            provisions of the Agreement.
            6. LThe provisions of this Article shall be applied as from 1
            January 2007.

                     Statement of the U.S. Tuna Foundation
        The U.S. Tuna Foundation (USTF), in response to the February 26,
    2003, House Ways and Means Committee hearing on President Bush's trade
    agenda, requests the following statement be included in the record:
        The U.S. Tuna Foundation is a trade association representing the
    interests of the U.S. canned tuna industry, including all U.S. canned
    tuna processors--Bumble Bee Seafoods (a wholly-owned subsidiary of
    ConAgra), StarKist Foods (H.J. Heinz), and Chicken of the Sea (Thai
    Union)--as well as all U.S. purse seine vessels that harvest tuna for
    the canned tuna market.
        The U.S. Congress and the U.S. International Trade Commission have
    deemed canned tuna to be an ``import sensitive'' product. Within the
    ITC, Section 201 (1984) and Section 332 (1986, 1990 and 1992)
    investigations reiterated that canned tuna is import sensitive. The
    facts that made canned tuna an import sensitive product then still
    apply today. For this and several other reasons, canned tuna should not
    be included in the products deemed eligible for duty-free treatment in
    any upcoming Free Trade Agreement.

    Background on industry:

         LCanned tuna is consumed by 96 percent of U.S households
    (Source: A.C. Nielsen Homescan data)
         LCanned tuna represents the number three item in U.S.
    grocery stores (behind only sugar and coffee) based on dollar sales per
    linear foot of shelf space (Source: A.C. Nielsen and industry analysis)
         LThe U.S. represents the largest single country market for
    canned tuna in the world. It is estimated that the U.S. canned tuna
    market represents 28 percent of global consumption. (Source: U.S.
    Department of Commerce--National Marine Fisheries Service, Eurostat,
    Foodnews, industry analysis)
         LThree U.S. brands, Bumble Bee, StarKist and Chicken of
    the Sea represent more than 85 percent of U.S. tuna consumption
    (Source: A.C. Nielsen)
         LCanned tuna represents a tremendous value versus other
    sources of canned protein. In May of 2000, lightmeat tuna retail prices
    were $0.10/ounce while albacore tuna retail prices were $0.23/ounce.
    Competitive proteins were significantly more expensive (canned
    chicken--$0.40/ounce, canned turkey--$0.40/ounce, SPAM--$0.33/ounce,
    corned beef--$0.20/ounce). (Source: Industry market basket survey, May
    2001)
         LDomestically canned tuna is currently processed in
    California, American Samoa, and Puerto Rico.

                           U.S. Pack of Canned Tuna:

    ------------------------------------------------------------------------
                    Year                            11,000 Pounds*
    ------------------------------------------------------------------------
                               1992                              608,981
    ------------------------------------------------------------------------
                               1993                              618,743
    ------------------------------------------------------------------------
                               1994                              609,514
    ------------------------------------------------------------------------
                               1995                              666,581
    ------------------------------------------------------------------------
                               1996                              675,816
    ------------------------------------------------------------------------
                               1997                              627,032
    ------------------------------------------------------------------------
                               1998                              680,860
    ------------------------------------------------------------------------
                               1999                              693,816
    ------------------------------------------------------------------------
                               2000                              671,330
    ------------------------------------------------------------------------
                               2001                              507,417
    ------------------------------------------------------------------------
                                                     *Canned weight
    ------------------------------------------------------------------------

    Source: Fisheries of the United States, 2001, Department of Commerce,
        National Marine Fisheries Service

         LThe quantity of canned tuna imports between 1990 and 2000
    increased by 10.0 percent while imports of frozen tuna loins increased
    by 67.3 percent. (Source: U.S. Department of Commerce--National Marine
    Fisheries Service)
         LDuring the same ten-year period, U.S. tuna processors
    moved towards heavier utilization of imported tuna loins (which carry a
    negligible import duty) taking advantage of low cost labor in Southeast
    Asia and Andean Pact countries. This led to reduced employment in U.S.
    factories.
         LDuring the ten-year period between 1990 and 2000, one of
    the two remaining tuna processing facilities in California closed and
    four of the five tuna processing facilities in Puerto Rico closed. The
    two U.S. factories in American Samoa continue to operate, as they are
    not obligated to pay the U.S. minimum wage rate.
         LWith the advent of canned tuna imports from low wage rate
    countries, retail pricing of canned tuna, when adjusted for inflation,
    has decreased by 53 percent between 1980 and 2000 (Source: Federal
    Trade Commission and industry data and analysis)

     ------------------------------------------------------------------------
      2003 Canned/Pouched
         Tuna Tariffs:               General                  Special
    ------------------------------------------------------------------------
     1604.14.10 (canned/                      35%          FREE (A+,CA,D,IL,J+)
     pouched tuna in oil)                               11.6% (MX,R) 24.5%
                                                                      (JO)
     1604.14.22 (canned/                       6%          FREE (A+,CA,D,IL,J+)
      pouched tuna not in                              2% (MX,R) 1.5% (JO)
       oil, below quota*)
     1604.14.30 (canned/                    12.5%          FREE (A+,CA,D,IL,J+)
      pouched tuna not in                              4.1% (MX,R) 5% (JO)
       oil, above quota*)
    ------------------------------------------------------------------------

        *The tariff rate quota for tuna in airtight containers not in oil
    (water pack) is based on 4.8 percent of apparent U.S. consumption of
    tuna in airtight containers during the preceding year.

    A+ = GSP least-developed beneficiary countries
    CA = NAFTA--Canada
    D = Africa Growth and Opportunity Act
    IL = Israel
    J+ = Andean Trade Promotion and Drug Eradication Act. Only pouched tuna
    is granted duty-free status. The tuna from which the pouched tuna is
    prepared must be caught by U.S.-flagged or ATPDEA-flagged vessels.
    JO = Jordan
    MX = NAFTA--Mexico
    R = Caribbean Basin Trade Partnership Act

    Canned/Pouched Tuna Tariff Impact:

        The current import tariff provides critical and necessary benefits
    to what is left of the U.S. tuna processing and fishing industry:

         LSupport for more than 10,000 U.S. tuna processing jobs in
    California, Puerto Rico and American Samoa, which jobs would be in
    jeopardy if the tariff were to be significantly reduced or eliminated
         LSupport for the American Samoa economy where 88 percent
    of private sector employment is provided by the U.S. canned tuna
    industry
         LSupport for the U.S. tuna fishing fleet of approximately
    33 vessels that operate out of American Samoa and supply the U.S. tuna
    processors located there. These vessels enable the United States to
    have a strong voice in fishery conservation and regulation activities
    in the Pacific Ocean, the largest tuna fishery in the world.
         LThe U.S. canned tuna industry has maintained for years
    that there should be international parity regarding tariff rates. We
    understand the desire of the United States to work toward the
    elimination of tariffs in the future. However, it makes no sense to us
    to unilaterally reduce tariffs when this causes an even greater
    disparity between the major world markets for a product like canned
    tuna that has repeatedly been found by the ITC to be import sensitive.

    International:

         LAn import tariff of 12.5 percent is well below import
    duties on canned tuna imposed by other major canned tuna markets. The
    European Union, the largest canned tuna market in the world, maintains
    a tariff of 24 percent on all canned tuna products and on all imports
    of tuna in any other form; Mexico, our NAFTA trading partner, imposes a
    tariff of 20 percent on canned tuna; and most other Latin American
    markets maintain tariffs on canned tuna at 20 percent or more. These
    tariffs obviously provide an unfair trade advantage against U.S. tuna
    processors.
         LThe U.S. trade deficit in fishery products has reached an
    all time high. The U.S. canned tuna market, once the most dominant
    canned tuna market in the world, has recently been surpassed by the
    European Union and continues to steadily decline in volume.
         LAs importantly, it is estimated that there is currently a
    50 percent over-capacity in the international tuna processing sector.
    Encouraging new processing capacity without cutting the existing over-
    capacity situation makes absolutely no sense.
         LThe U.S. represents the largest single country market for
    canned tuna in the world. It is estimated that the U.S. canned tuna
    market represents 28 percent of global consumption. (Source: U.S.
    Department of Commerce--National Marine Fisheries Service, Eurostat,
    Foodnews, industry analysis)
         LDue to the intense competitive environment caused by low
    cost foreign imports, retail prices of canned tuna in the United States
    are the lowest among all developed nations of the world. Comparison
    includes Australia, Canada, France, Germany, Italy, Spain and the
    United Kingdom (Source: Industry analysis)
         LU.S. canned tuna processors face significant wage
    disparities when compared with major tuna exporters. Average hourly
    wage rates in U.S. processing facilities in California, Puerto Rico and
    American Samoa are approximately $11.00, $6.50 and $3.75, respectively.
    The average hourly labor rate in the key exporting country of Thailand
    is approximately $0.60.
         LMost canned tuna processors in foreign nations are not
    required to abide by the same health, welfare, safety, regulatory,
    conservation or environmental standards imposed on U.S. processors. In
    addition, they often receive government and other financial subsidies
    that provide an unfair economic advantage.
         LU.S. tuna vessel owners are similarly disadvantaged as
    they are required to abide by strict regulatory, environmental and
    conservation standards that are rigorously enforced by the U.S.
    Department of Commerce--National Marine Fisheries Service and the U.S.
    Coast Guard. Many of these standards are not observed by foreign flag
    vessels and are not enforced by their respective governments.

    Conclusion:

        For all of the above reasons, canned and pouched tuna should not be
    in- cluded in the products deemed eligible for duty-free treatment in
    any up- coming Free Trade Agreement.

                                                                Verizon
                                                   Washington, DC 20005
                                                         March 19, 2003
    The Honorable William Thomas
    Chairman
    House Ways and Means Committee
    Longworth House Office Building
    Washington, D.C. 20515

    Dear Chairman Thomas:

        Verizon appreciates having the opportunity to submit comments to
    the House Ways and Means Committee as a follow-up to the Committee's
    February 26 hearing on the Bush Administration's trade agenda.
        As one of the world's leading providers of telecommunications
    services, Verizon applauds the Bush Administration's efforts to pursue
    new trade agreements at the multilateral, regional and bilateral
    levels. The liberalization of global markets and the elimination of
    trade barriers will be critical to ensure the long-term growth of the
    telecommunications industry, both in the United States and overseas. We
    believe that robust trade will stimulate necessary investment in the
    telecommunications sector, and in turn fuel the expansion of all
    industries and sectors that rely immeasurably on the telecommunications
    infrastructure.
        During the course of the past few years, Verizon has worked closely
    with the Office of the U.S. Trade Representative to discuss goals and
    objectives for the negotiation of telecommunications commitments in
    trade agreements. We have advised USTR that the most appropriate
    approach to negotiating telecommunications commitments would encompass
    the following:

         LFull market access to permit U.S. telecommunications
    companies to develop telecommunications facilities and services in the
    markets of parties that are subject to trade agreements;
         LElimination or significant reduction of foreign ownership
    restrictions;
         LCommitment to pro-competitive regulatory principles, such
    as those contained in the Reference Paper of the WTO Agreement on Basic
    Telecommunications Services;
         LApplication of trade principles such as non-
    discrimination, national treatment and transparency to
    telecommunications commitment.
         LProvide mechanisms for ``institution building,''
    including the strengthening of the independent telecommunications
    regulator through strong enforcement authorization and dispute
    resolution procedures.

        Additionally, we remain firmly committed to the view that trade
    commitments made for the telecommunications sector should not encompass
    regulatory obligations that are more specific or prescriptive than the
    principles articulated in the Reference Paper. The inclusion of
    detailed telecommunications regulatory provisions in trade agreements
    would be damaging for several reasons. First and foremost, the parties
    to any such trade agreement could be bound in perpetuity to regulatory
    obligations that are likely to become outmoded as technologies advance
    and market forces change the nature and scope of the telecommunications
    sector. As we have witnessed in the U.S., there are multiple regulatory
    proceedings under consideration at the Federal Communications
    Commission that are the subject of tremendous controversy. At a time
    when the U.S. is struggling to determine appropriate levels of
    regulation versus forbearance in its domestic markets, it would be
    wrong to require our trading partners to adopt a mirror image of the
    U.S. telecommunications regulatory regime as a trade obligation.
        Furthermore, overly prescriptive regulations may inadvertently tip
    the competitive balance in favor of one form of telecommunications
    competition, such as resale, over facilities-based development. Given
    the fact that so many of the U.S.' trading partners urgently require
    the deployment of telecommunications facilities to provide universal
    telecommunications services and support advanced electronic commerce
    applications, every effort must be taken to ensure that trade
    agreements encourage investment in, and development of,
    telecommunications infrastructures.
        There is no question that in order to achieve full liberalization
    in the telecommunication sector, many countries will find it necessary
    to undertake substantial regulatory reforms. Be that as it may, Verizon
    does not believe that the achievement of open market access can be
    realized through overly stringent regulations. The advantage of using a
    Reference Paper approach to regulatory reform is that it provides
    meaningful guideposts for the establishment of pro-competitive
    regulatory regimes, while at the same time, ensuring that each country
    retains sufficient flexibility to develop regulations in a manner that
    responds to specific economic and market conditions on the national
    level.
        On a final note, Verizon encourages the USTR to negotiate with our
    trading partners to ensure the elimination of any barriers that may
    impede the development of electronic commerce. One important aspect of
    e-commerce negotiations will be efforts to establish a balanced model
    for protecting intellectual property rights (IPR) in an on-line
    environment. We have advised USTR that any trade agreements pertaining
    to on-line IPR protection must carefully balance the interests of all
    rightsholders, network operators, service providers and users,
    including limiting the liability of online service providers in
    accordance with the U.S. Digital Millennium Copyright Act (DMCA).
        In conclusion, Verizon is confident in the capabilities of U.S.
    trade negotiators to secure vibrant trade agreements that will benefit
    U.S. corporations and citizens, as well as serve the interests of our
    foreign trading partners. We also believe that the U.S. Congress will
    continue to play an extremely important role in the trade arena, and we
    encourage the House Ways and Means Committee to work closely with the
    USTR as negotiations proceed in the WTO Doha Development Round, the
    Free Trade Area of the Americas (FTAA), and the bilateral free trade
    agreements that have been initiated.
                Sincerely.
                                                  Karen Corbett Sanders
                            Vice President, International Public Policy
                                                 and Regulatory Matters

                     Statement of the Zero Tariff Coalition

    Members of the Committee:

        Thank you for the opportunity to provide these written comments as
    part of the official record of the February 26, 2003 hearing on U.S.
    trade policy.
        The Zero Tariff Coalition represents 25 sectors of the American
    economy that believe that the most practical method of obtaining the
    greatest non-agricultural market access gains for their sectors in the
    World Trade Organization Doha round is through a Sectoral Tariff
    Elimination (STE) approach. A list of the Zero Tariff Coalition sectors
    is attached to this submission.
        STE is a proven approach that solves negotiating problems other
    modalities cannot manage--particularly in resolving the problem of the
    huge disparity between the generally low U.S. industrial tariffs and
    the high tariffs in developing countries. The approach is basically the
    same as the Uruguay Round's successful ``Zero-for-Zero'' initiative and
    the WTO Information Technology Agreement (ITA), though modifications
    have been incorporated to broaden its applicability.
        The Ways & Means Committee endorsed such an approach in its report
    on the Trade Act of 2002. We urge the Committee to join us in pressing
    U.S. negotiators to 1) ensure that zero-for-zeros, i.e. STEs, are
    incorporated as a modality for the non-agricultural market access group
    negotiations in any decisions reached on modalities, as called for by
    the current deadline of May 31, 2003; and 2) that U.S. priority
    sectors, including all the sectors of our coalition, be listed as
    sectors that will pursue STE agreements at the WTO ministerial meeting
    this September in Cancun, Mexico.
        Under STE, countries comprising a satisfactory ``critical mass'' of
    trade in a particular sector would agree to eliminate tariffs in that
    sector at the earliest feasible time. Countries would only agree in
    those instances in which their specific sectors wanted to participate
    in particular sectoral arrangements. By requiring only a critical mass
    of countries in each sector, the STE modality provides flexibility to
    exempt least developed countries as well as others that want to be
    excluded, while ensuring that the sectoral agreement remains
    commercially meaningful. To assure flexibility, the definition of
    ``critical mass'' must be sector-specific rather than an overall
    grouping of countries that participates in all sectors.
        Flexibility would be maximized by avoiding defining these sector-
    specific ``critical masses'' early in the negotiations. Moreover,
    product coverage for any given STE sector would be determined by the
    participating countries. Further flexibility can be gained by allowing
    longer transition periods for some countries and for certain sensitive
    products. Moreover, for some sectors, a critical mass of countries may
    be unable to agree on the goal of zero duties, but ultimately might be
    able to decide on a harmonized rate that is significantly lower than
    current applied rates.
        The possibility of negotiating an initial STE package of sectors as
    an interim result prior to the conclusion of the DDA should be
    considered as an option, as is provided for in the Doha ministerial
    declaration. An interim STE result could be provisional and should be
    taken into consideration in determining the DDA's final balance of
    concessions.
        To ensure wide interest, all WTO members should be encouraged to
    recommend sectors for STE treatment. Maximum attention should be given
    to STE candidates raised by developing countries. Additionally, the
    Doha Declaration calls for environmental goods and services barriers to
    be cut, and this sector should be an STE candidate.
        In addition to new STE's, country and product coverage should be
    expanded in existing sectoral measures initiated in the Uruguay Round.
    Emphasis should also be given to increasing the country participation
    and product coverage of the Information Technology Agreement (ITA), and
    to gaining complete elimination of tariffs (as opposed to
    harmonization) in the chemical sector by more countries than just those
    currently party to the Chemical Tariff Harmonization Agreement (CTHA).
        Most of our sectors also want their products included in the
    ``immediate elimination'' basket of the tariff phaseout schedules
    negotiated in the Free Trade Area of the Americas or any bilateral or
    sub-regional trade agreements.
        Attachment

    U.S. Sectors Advocating Sectoral Tariff Elimination (STE) in WTO's Doha
         Development Agenda Non-Agricultural Market Access Negotiations

                                   chemicals

                           crop protection chemicals

                        construction & mining equipment

                   copper & copper alloy brass mill products

                                   cosmetics

                               distilled spirits

                              electrical equipment

                                energy products

                             environmental products

                                   fertilizer

                            fish & seafood products

                 information technology & electronics products

                                 gems & jewelry

                               medical equipment

                                 paper products

                                pharmaceuticals

                 printing, publishing & converting technologies

                                processed foods

                                    soda ash

                                 sporting goods

                                 steel products

                                      toys

                                 wood machinery

                                 wood products

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