[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 
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                            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 
[email protected], 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.
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    \iv\ U.S. Trade Promotion Authority, Article 2102(b)(11)(D).
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    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).

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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: [email protected]

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\
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    \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.
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    \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 [email protected] 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


                                   - 
