[Senate Hearing 108-593]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-593

      NAFTA: A TEN YEAR PERSPECTIVE AND IMPLICATIONS FOR THE FUTURE

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 20, 2004

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                 ------                                

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                    CHUCK HAGEL, Nebraska, Chairman

LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
MICHAEL B. ENZI, Wyoming             JOHN D. ROCKEFELLER IV, West 
LAMAR ALEXANDER, Tennessee               Virginia
NORM COLEMAN, Minnesota              JON S. CORZINE, New Jersey
                                     CHRISTOPHER J. DODD, Connecticut

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page

Aldonas, Hon. Grant D., Under Secretary for International Trade 
  Administration, U.S. Department of Commerce, Washington, DC....     3
    Prepared statement...........................................     6
Bergsten, Dr. C. Fred, director, Institute for International 
  Economics, Washington, DC......................................    62
    ``Investment Provisions Under NAFTA,'' response for the 
      record.....................................................    83
Coleman, Hon. Norm, U.S. Senator from Minnesota, submissions for 
  the record:
    Letter to the Secretary of Agriculture and U.S. Trade 
      Representative, dated October 29, 2003, concerning Mexico 
      initiating an illegal antidumping case restricting pork 
      exports....................................................    41
    Letter from Joint Public Advisory Committee (JPAC), dated 
      April 13, 2004, advocating a moratorium on importing 
      transgenic or biotech corn into Mexico.....................    46
Hagel, Hon. Chuck, U.S. Senator from Nebraska, opening statement.     1
Hufbauer, Dr. Gary, research associate, Institute for 
  International Economics, Washington, DC, statement submitted 
  for the record.................................................    65
Lee, Ms. Thea M., chief international economist, American 
  Federation of Labor and Congress of Industrial Organizations 
  (AFL-CIO), Washington, DC......................................    67
    Prepared statement...........................................    70
Vargo, Mr. Franklin J., vice president, International Economic 
  Affairs, National Association of Manufacturers, Washington, DC.    55
    Prepared statement...........................................    57
Rosales, Hon. Manuel, Assistant Administrator for International 
  Trade, U.S. Small Business Administration (SBA), Washington, DC    31
    Prepared statement...........................................    33
Terpstra, Hon. A. Ellen, Administrator, Foreign Agricultural 
  Service, U.S. Department of Agriculture, Washington, DC........    26
    Prepared statement...........................................    28
Wayne, Hon. E. Anthony, Assistant Secretary of State for Economic 
  and Business Affairs, U.S. Department of State, Washington, DC.    17
    Prepared statement...........................................    19

                                 (iii)

  

 
     NAFTA: A TEN YEAR PERSPECTIVE AND IMPLICATIONS FOR THE FUTURE

                              ----------                              


                        TUESDAY, APRIL 20, 2004

                           U.S. Senate,    
     Subcommittee on International Economic
                Policy, Export and Trade Promotion,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
SH-216, Hart Senate Office Building, Hon. Chuck Hagel (chairman 
of the subcommittee), presiding.
    Present: Senators Hagel and Coleman.


                opening statement of senator chuck hagel


    Senator Hagel. Good afternoon. This year marks the 10th 
anniversary of the North American Free Trade Agreement, NAFTA. 
NAFTA has been an economic and foreign-policy success for the 
United States, Canada and Mexico; and as a trade agreement, 
NAFTA is a testament to the positive impact that trade has on 
economic growth, job creation and prosperity.
    Since the implementation of NAFTA, total trade between the 
United States, Canada and Mexico has more than doubled, rising 
from $306 billion in 1993 to just over $621 billion last year. 
U.S. exports to Canada and Mexico have surged from $142 billion 
to $263 billion during this same period. The effects on my home 
State of Nebraska provide an example of the benefits of NAFTA. 
Last year, Nebraska exports to Canada and Mexico totaled over 
$1.2 billion. Those goods largely consisted of agricultural 
products, like beef and corn. During the past 5 years under 
NAFTA, Nebraska's trade with Mexico increased by 87 percent, 
while trade with Canada increased 28 percent.
    In addition to significant growth in the agricultural 
sector, America's manufacturing sector has also benefited from 
NAFTA. Production and manufacturing over the last 10 years of 
NAFTA has increased by 41 percent. During the first 5 years of 
NAFTA, the manufacturing base in the U.S. added some 500,000 
new jobs.
    A major study conducted by UCLA at the North American 
Integration and Development Center showed that U.S. exports 
under NAFTA generate over 70,000 new jobs each year. Real 
hourly wages for U.S. workers, since NAFTA, have increased 
almost 15 percent. Additionally, the average American family of 
four now sees an additional $930 in earnings per year because 
of the benefits of NAFTA trade.
    Mexico, like the United States, has benefited significantly 
from NAFTA. Exports from Mexico since 1993 have increased by 
232 percent. Between 1993 and 2001, the agricultural sector in 
Mexico saw its productivity increase by over 50 percent. Today, 
one in five people in Mexico are employed in export-related 
jobs that pay an average 37 percent higher wages than non-
export-related jobs. Overall, NAFTA has resulted in a 
considerable increase in the standard of living for the Mexican 
population. GDP per capita has grown from $3,200 in 1993 to 
$8,900 in 2002.
    NAFTA is not only about trade in goods and services. One of 
the most important results of NAFTA is the increased flow of 
capital across borders. Today, the United States continues to 
be the largest source of foreign direct investment in Canada, 
and NAFTA has had a considerable impact on foreign direct 
investment flows to and from Mexico. Since 1994, U.S. 
investment in Mexico has increased by 259 percent, to over $58 
billion. Likewise, Mexico has increased its investment in the 
United States by 244 percent, to about $8 billion.
    Increasing levels of trade and interdependence initiated by 
NAFTA have had a profound societal impact on the United States, 
Canada and Mexico, and have greatly improved hemispheric 
relations over the last decade. The election of President 
Vicente Fox in 2000, the first opposition party candidate to be 
elected in 71 years, reflects Mexico's evolution from a 
centralized, one-party protectionist state toward a multi-party 
capitalist democracy.
    NAFTA has set the stage for improved bilateral relations 
between the United States, Canada and Mexico. Since NAFTA's 
inception, several side agreements have been established to 
address issues related to the environment, labor, and market-
adjustment relief. Trade agreements were never meant to be 
static agreements left unchanged over time. When disagreements 
arise between trading partners, NAFTA provides a mechanism to 
address the issues. Free trade agreements such as NAFTA allow 
nations to find cooperative solutions to ever-changing 
conditions in the global economy.
    This hearing today will examine what has transpired over 
the last decade with NAFTA and what the future might hold for 
this agreement and its partners. The first panel will include 
Under Secretary of Commerce, Grant Aldonas; Assistant Secretary 
of State, Tony Wayne; Administrator of the U.S. Department of 
Agriculture Foreign Agricultural Service, Ellen Terpstra; and 
Assistant Administrator for the Small Business Administration, 
Manuel Rosales.
    Second panel will include Ms. Thea Lee, chief international 
economist with the AFL-CIO; Dr. C. Fred Bergsten, director of 
the Institute for International Economics; and Mr. Frank Vargo, 
vice president of International Economic Affairs at the 
National Association of Manufacturers.
    Ladies and gentlemen, we are most grateful for your time 
today and look forward to your testimony, and I would ask that 
you present that testimony in the order that I introduced you.
    So, with that, Secretary Aldonas, nice to see you again. 
Welcome.

STATEMENT OF HON. GRANT D. ALDONAS, UNDER SECRETARY OF COMMERCE 
  FOR INTERNATIONAL TRADE ADMINISTRATION, U.S. DEPARTMENT OF 
                            COMMERCE

    Mr. Aldonas. Thank you, Mr. Chairman, and good to see you, 
Senator Coleman.
    First of all, thank you for the opportunity to testify 
before the subcommittee on NAFTA's economic impact and the road 
forward. I particularly applaud the subcommittee's interest in 
NAFTA, and welcome your thoughts and the lessons we should draw 
from the experience.
    If I could, I'd like to summarize my testimony and ask that 
my written statement be introduced in the record.
    Senator Hagel. All of the written statements will be 
included in the record, so any of you that want to abbreviate 
your statements, that's acceptable.
    Mr. Aldonas. Thank you, Mr. Chairman.
    I wanted to offer three perspectives on NAFTA. First, as my 
testimony reflects--and I know as your opening statement 
reflected as well, Mr. Chairman--there's a broad consensus 
among economists that NAFTA has had, in broad terms, a positive 
impact on the U.S. economy and on our trading partners. Much of 
the debate about NAFTA, in my view, has focused on the wrong 
questions--narrowly focusing on jobs lost, jobs gained--but 
missing the real power and impact that trade can have on our 
economy as well as on those of our trading partners.
    While the growth and trade that flows from a trade 
agreement is a powerful indicator that the agreement is 
working, the ultimate test is whether an agreement contributes 
to stronger growth, a more productive economy, and ultimately a 
rising standard of living. By that standard, NAFTA has stood 
the test of time. The numbers bear that out. Total trade with 
our NAFTA partners has more than doubled, from $302 billion in 
1993 to $652 billion in 2003. That's $1.8 billion in trade 
every day, or $1.2 million per minute.
    That figure represents over one third of total U.S. 
exports. In fact, U.S. exports to Canada and Mexico increased 
from $142 billion to $267 billion in NAFTA's first decade, 
significantly higher than the 41 percent increase of our 
exports to the rest of the world.
    Moreover, the benefits of NAFTA are broadly distributed 
throughout the United States. Forty seven states increased 
their merchandise exports to Canada and Mexico from 1993 to 
2003, 25 states recorded increases of more than $1 billion. In 
fact, 24 states more than doubled exports to Canada and Mexico 
over that 10-year period.
    Well, what has that meant for our economic growth and our 
standard of living if that is the acid test? Over the last 
decade, the American economy has grown by 38 percent. That 
growth has elevated our standard of living, with GDP per capita 
rising 22 percent. That higher standard of living is consistent 
with the strong productivity growth that you mentioned, Mr. 
Chairman, which rose 53 percent in the United States from 1993 
to 2002.
    What's also significant is, today's unemployment rate at 
5.7 percent is significantly below the 6.9 percent unemployment 
rate that prevailed in 1993, prior to NAFTA. Significantly, our 
population was growing throughout the intervening 10 years, 
while unemployment was dropping, which means that the rate of 
job creation was and is higher than a simple comparison of 
those numbers reveals.
    In short, North American economic integration prefigured a 
period of extraordinarily strong economic growth in the United 
States, which is once again the case today. While NAFTA was not 
the sole cause, it was undoubtedly a contributing factor in our 
success over that time.
    Second, based on my experience in Mexico, I think that 
NAFTA's also contributed significantly to positive changes in 
the political environment in Mexico that you mentioned, Mr. 
Chairman, and caused a positive shift in our relations with our 
southern neighbor, as well. While I'll defer to Tony about many 
of the foreign policy aspects, I did want to offer just a 
personal thought, as a former Foreign Service officer whose 
first tour was in Mexico. I have a sense of the differences 
that existed in Mexico 25 years ago and what exists there 
today. In 1980, when I first worked in Mexico, the political 
system served as a brokering mechanism among economic 
stakeholders, but it wasn't what I would describe as a healthy 
democracy prone to healthy and open democratic debate. But 
today, Mexico is anything but that. The political debate takes 
place before the public in a functioning Congress and the media 
on a daily basis, rather than being decided behind closed 
doors.
    I can also attest, as a member of the Bush administration, 
the positive dialog we've developed on economic matters. It is 
a dialog that focuses on solving our immediate differences, as 
you pointed out, Mr. Chairman, but also a sense of a broader 
shared perspective regarding our economic future, and the need 
to focus on North American competitiveness in facing up to 
competition in a global economy. The shared experience of 
participating in NAFTA has contributed significantly to that 
change in perspective.
    Third, on the other hand, I always believe we shouldn't 
underplay the dislocations that can result from trade. A good 
example is one that I saw recently in the Washington Times 
about developments in Senator Allen's and my home State of 
Virginia. The article noted the changes in Martinsville, which 
is in the Blue Ridge, on the North Carolina border, and I think 
the article got it mostly right. It pointed out that the 
economic transition isn't easy. Martinsville's unemployment 
rate is currently three times the national average.
    Where I think the article got it wrong, though, was blaming 
those conditions on NAFTA, solely on NAFTA, though I can 
understand how that thought developed. The fact is, even in the 
textile sector, which Martinsville has depended on, NAFTA had 
an initial positive effect. Textile shipments in our industry 
actually rose by 13 percent in the first 3 years of NAFTA.
    Since that time, however, our textile industry has faced 
fierce competition from Asia, particularly after the Asian 
financial crisis, which, as we know, resulted in a radical 
realignment of exchange rates. Was the cause of these 
conditions in the textile industry trade related? Undoubtedly. 
Would it be right to lay it at NAFTA's doorstep? Absolutely 
not.
    My point is not to take away from the impact on the daily 
lives, whether it's of shop owners or school teachers in 
Martinsville, but underscore how much of what has been blamed 
on NAFTA really flows from other sources. And the point is that 
even acknowledging those serious examples of economic 
dislocation, NAFTA did not lead to the economic ruin that 
NAFTA's critics predicted for the United States and Mexico.
    One of the reasons I think today's hearing is so important 
is my concern that we're generally talking past each other in 
the debate about trade. The proponents of NAFTA--and I'm one of 
them--tend to argue the aggregate case, which is positive, and 
broadly spread across our entire economy; whereas, the 
opponents of the trade often focus exclusively on the 
dislocations, i.e., specific instances of painful economic 
adjustment. Both cloud the fact that the basic lesson we should 
draw from NAFTA, even as a surrogate for the broader phenomenon 
of globalization, is the need to seize the opportunities that 
trade liberalization provides, while preparing to compete in a 
global economy. If there's ever a lesson we should draw from 
NAFTA, that has to be it, that work has to happen on both 
sides.
    I'm reminded of the statement you made recently on the 
floor, Mr. Chairman, that focused specifically on the need to 
seize the opportunities that trade with NAFTA and globalization 
provides; at the same time, adjustment measures that really do 
put us in the campaign, and that what we do, at the end of the 
day, is have a work force that measures up to what's needed in 
our manufacturing sector, particularly today.
    Having spent the last year focusing on manufacturing, one 
of the insights I took away is that while the economy has been 
struggling to produce jobs and now things seem to have turned 
around, we actually face a significant shortfall, in terms of 
trained workers to work in the manufacturing sector. Those two 
things don't square.
    If we do want to take advantage of the opportunities to 
compete in a global economy, we are going to have to put our 
money where our mouth is to make sure that we've got a work 
force that can compete and can be employed in a manufacturing 
sector that still represents, standing alone, the fifth largest 
economy in the world.
    What I'd like to do is close by pointing out just one last 
thing. I think the question for both Congress and the 
administration, whether it's about trade or it's about domestic 
economic policy, it actually boils down to one thing. It's a 
lens through which I think we need to examine what we do on 
trade and what we do on adjustment policies, whether it is tax, 
regulation, really the whole gamut of what Congress confronts. 
And that lens is whether the steps we take will actually make 
us more competitive in the global economy that we now face. 
That's the sole lens, really, that should guide our work as we 
move forward.
    Taken in that context, NAFTA has undoubtedly helped the 
American economy, as a whole; not just in terms of the direct 
effects of exports and jobs, but also on how we face that 
question of global competition and prepare for it.
    Let me stop there, and I look forward to your questions.
    Thank you.
    [The prepared statement of Mr. Aldonas follows:]

              Prepared Statement of Hon. Grant D. Aldonas

    Thank you, Mr. Chairman, Senator Sarbanes, and Members of the 
Subcommittee, for inviting me to discuss the impact of the North 
American Free Trade Agreement (NAFTA) on our economy since it entered 
into force just over ten years ago.
    My testimony addresses this topic in five parts:

   NAFTA's economic impact on our economy as a whole;

   NAFTA's impact on a number of specific sectors in the U.S. 
        economy;

   NAFTA's impact on Mexico's economy and politics and the 
        implications for our relations with Mexico;

   Commerce's role in enhancing economic opportunities for our 
        exporters, as well as helping foster the broader economic 
        relationship with our two most important trading partners; and

   NAFTA's next decade and the need to focus on our collective 
        economic competitiveness as we face the challenge of competing 
        in a global economy.

I. NAFTA'S IMPACT ON THE U.S. ECONOMY--TRADE, GROWTH, PRODUCTIVITY, AND 
                               EMPLOYMENT

    In assessing NAFTA's impact on our economy, it is important to 
focus on what trade liberalization really does. The argument over 
international trade is most commonly reduced to a simple comparison of 
jobs gained through enhanced exports and jobs lost through increased 
import competition. That is, in fact, exactly how the Clinton 
Administration promoted the passage of the NAFTA implementing 
legislation and how NAFTA's critics articulated their case and I will 
address the employment issues later in my testimony.
    But, that equation--export jobs gained versus jobs lost to import 
competition--misses the real impact of trade liberalization. We often 
forget that NAFTA is a trilateral agreement linking our economy to 
those of Canada and Mexico, and theirs to each other. By liberalizing 
our trade, we eliminated most of the external barriers and 
disincentives to allocating capital and labor to their most productive 
use.
    In the process, we improved the efficiency and productivity of each 
economy participating in the agreement. The real gains are from trade 
flow of these efficiency gains and the rationalization of production 
they allow. While the economic efficiencies trade creates can cause 
some short-term adjustment, the gains are well worth the effort. And 
there is no better testament to that than the fact that world trade has 
increased at more than double the rate of growth of the world economy 
for several decades.
    What follows from that logic is that the best measure of NAFTA's 
impact on our economy, as well as on the economies of Canada and 
Mexico, does not flow from the comparison of jobs gained or lost solely 
in industries that are directly affected by exports and imports. 
Rather, the most important measure of NAFTA's impact, as is true of any 
trade agreement, is on the economic growth and productivity of the 
participating countries' economies. And, I would add a corollary--
whether the agreement has made us more competitive in the context of a 
rapidly globalizing world economy.
    NAFTA's tenth anniversary offers an appropriate moment to step back 
and assess whether the agreement has met that test. The answer, in the 
case of the NAFTA, is a resounding yes. Each country has grown 
considerably faster than it did in the previous decade and each 
witnessed a significant rise in productivity. Indeed, each of the three 
economies recovered more quickly from the worldwide recession that 
began in 2000 than all of our other major trading partners with the 
exception of China. While NAFTA was not the sole source of the success 
of our three economies over the intervening 10 years, there is, on the 
other hand, little doubt that NAFTA was an important contributing 
factor.
    When President George H.W. Bush accepted President Salinas' offer 
to negotiate NAFTA, many people in the United States expressed 
considerable doubt about the wisdom of that decision. The skeptics 
predicted disaster for the U.S. economy and for Mexico. Despite the 
frequently repeated criticisms over the past 10 years and the effort 
expended to diminish NAFTA's accomplishments, however, the blunt fact 
is that NAFTA did not lead to the economic ruin some predicted. The 
numbers leave little doubt that our economy and our citizens are far 
better off today than they would be had we not taken the historic step 
of negotiating this agreement in the early 1990s. The same can be said 
for the economies and citizens of Canada and Mexico.
    In trade terms alone, NAFTA has proven to be a remarkable success. 
Total trade among the NAFTA partners has more than doubled from $302 
billion in 1993 to $652 billion in 2003. That's $1.8 billion in trade 
every day--$1.2 million per minute. That figure represents over one-
third of total U.S. exports. In fact, U.S. exports to Canada and Mexico 
increased from $142 billion to $267 billion in NAFTA's first decade--
significantly higher than the 41 percent increase of our exports to the 
rest of the world.
    Canada, of course, was and is our largest trading partner. U.S. 
exports to Canada are up by nearly 69 percent since 1993 and account 
for 23 percent of U.S. merchandise exports. We trade more with the 
province of Ontario than we do with Germany. In fact, Ontario alone is 
our second largest export market.
    Nonetheless, the more remarkable story is the expansion of trade 
with Mexico. Since NAFTA's entry into force, Mexico has overtaken Japan 
to become our second largest trading partner. Since 1993, trade with 
Mexico has nearly tripled in nominal terms and the share of U.S.-Mexico 
trade in overall U.S. trade has increased from 7.8 to 11.9 percent.
    The benefits of NAFTA in the United States are, moreover, 
widespread. Forty-seven states increased their merchandise exports to 
Mexico and Canada from 1993 to 2003. Twenty-five states recorded 
increases of more than $1 billion. In fact, twenty-four states more 
than doubled exports to our NAFTA partners over the ten-year period.
    Some of the fastest export growth came not from traditional export 
powerhouses but from states such as Wyoming whose exports to Mexico and 
Canada rose by more than 400 percent from 1993 to 2003 and West 
Virginia with growth of 187 percent. Canada is the largest export 
market for thirty-seven states and twenty-three states send more than 
one quarter of their exports north of the border. Mexico is the largest 
export market for three states and the second largest export market for 
seventeen more.
    What did that mean for our economic growth and our standard of 
living? During the intervening 10 years since NAFTA went into force, 
the American economy grew by 38 percent or 3.8 percent per year on 
average. Similarly, the Canadian economy grew by 41 percent (4.1 
percent per year) and the Mexican economy grew by 30 percent (3.0 
percent per year). That growth translated into a rising standard of 
living. In the United States, GDP per capita rose by 22 percent. Per 
capita GDP grew by 28 percent in Canada and by 12 percent in Mexico.
    That increase in our standard of living is fundamentally consistent 
with a strong upswing in productivity in all three countries since 
NAFTA was signed. Rising productivity is essential to a rising standard 
of living in any country and, by that measure, NAFTA fares 
extraordinarily well. Productivity rose 53 percent in the United States 
from 1993 to 2002, whereas productivity gains in Mexico equaled 55 
percent and Canadian gains totaled 23 percent. While efficiency gains 
due to trade liberalization were not the sole reason for rising 
productivity, NAFTA undoubtedly contributed.
    The U.S. gains in productivity are particularly striking when 
viewed against the historical backdrop of the 1980s U.S. economy--one 
in which productivity was lagging and our competitiveness was in doubt. 
When viewed as a zero-sum game, as trade is by many of its critics, it 
is not difficult to see why they were concerned with the prospect of 
NAFTA. There seemed little prospect that the United States could 
compete with lower wages in Mexico given its stagnating productivity.
    The point, of course, is that trade is not a zero-sum game and the 
very gains in productivity that flowed from NAFTA were one of the 
reasons that the United States could continue, not only to compete, but 
also to succeed in regaining its competitiveness globally. That fact is 
borne out by the employment numbers of the past decade.
    While much of the recent debate about the recovery of the U.S. 
economy has focused on job growth, the debate tends to ignore the fact 
that unemployment today, even coming out of a recession, is 
significantly lower than it was the year before NAFTA went into effect. 
The U.S. unemployment rate stood at 6.9 percent in 1993; today, that 
figure is roughly 5.7 percent. Canada's unemployment rate is nearly 4 
percentage points lower today than it was in 1993 (11.4 versus 7.6 
percent). While Mexican employment figures are estimates for urban 
areas only and are not, therefore, directly comparable to the U.S. and 
Canadian figures, they nonetheless are slightly lower today than a 
decade ago (3.4 versus 3.3 percent).
    Significantly, the population of the three countries was growing 
throughout the intervening 10 years while unemployment was dropping. 
What that means is that, rather than witnessing significant job losses 
due to NAFTA, the rate of job creation in all three economies stayed 
ahead of increases in population.
    In fact, the result is that NAFTA has been virtually job neutral. 
Given what most reputable economists say about the employment effects 
of NAFTA, that finding is not surprising. Sandra Polaski of the 
Carnegie Endowment wrote in the Endowment's recent publication 
``NAFTA's Promise and Reality,'' that ``the best models to date suggest 
that NAFTA has caused either no net change in [U.S.] employment or a 
very small net gain of jobs.'' Similarly, in a December 2001 report, 
the International Trade Commission noted that even ``the most extreme 
estimate of job gains or losses due to NAFTA are on the order of 
hundreds of thousands of jobs.''
    It is always important to put numbers like that in context. For 
example, in any three-month period, the U.S. economy both creates and 
loses roughly 7.5 million jobs. Seen in that light, even the most 
extreme claims of job losses due to NAFTA after 10 years would amount 
to less than 10 percent of the jobs lost or created every three months 
in the United States.
    Those figures bear out a point made in the January 3, 2004 issue of 
The Economist. There, the authors, rightfully in my view, criticized 
the proponents of NAFTA for overselling their case, noting, ``It was 
never plausible, for instance, to expect that NAFTA would be a net 
creator of jobs. Trade policy is not a driver of overall employment; it 
affects the pattern of jobs, rather than the total number.''
    That criticism, of course, applies with equal force to NAFTA's 
critics and their arguments regarding job losses. Simply put, there was 
no ``giant sucking sound.'' Far from debilitating the U.S. economy, 
NAFTA prefigured a period of extraordinarily strong economic growth in 
all three economies. The argument that NAFTA spelled economic ruin is 
simply not sustainable.

                          II. SECTORAL IMPACT

    Moving from the aggregate to the specific, the evidence on the 
impact of NAFTA on several sectors of our economy is overwhelmingly 
positive. NAFTA-related trade and investment liberalization has allowed 
U.S. firms not just to find new markets in Canada and Mexico. They have 
also maximized efficiencies, gained in terms of global competitiveness, 
and increased sales to other world markets as well.
    Examining sectors does, however, underscore certain basic and 
important lessons about competing in a global economy. Those industries 
that seized the opportunity that NAFTA afforded and made investment and 
employment decisions based on the expectation that trade would increase 
and innovation would thrive were rewarded. Those industries that bet 
against NAFTA and did not make needed adjustments to do business in a 
more competitive environment were not as successful.
    The gains from NAFTA in the automotive sector offer one of the 
pact's most compelling success stories. Before NAFTA entered into 
force, exports to Mexico from the United States were artificially 
constrained by a host of measures enacted by the Mexican government to 
force firms to maintain local production in Mexico, if they wished to 
sell in the market.
    I can testify personally to the impact that had on consumers. In 
1980, when I was a junior Foreign Service Officer, I was assigned to 
Mexico. One of the most surprising things I was told by the State 
Department as I began the process of relocating to Mexico was the fact 
that my U.S.-made Ford could not enter Mexico. I was obliged to buy a 
Volkswagen Rabbit, a model that was made in Mexico, as our family car 
for the next two years and at a generously higher price.
    NAFTA put an end to those practices and led to an amazing rate of 
growth in our automobile exports to Mexico. The numbers bear that out. 
In 1993, our shipments of new passenger vehicles and light trucks 
totaled less than $95 million. They jumped 500 percent in 1994, the 
first year of the agreement, reaching $580 million. By the end of 2003, 
U.S. exports to Mexico totaled $3.2 billion, a 3400 percent increase in 
shipments when compared to 1993.
    Still more importantly, without the constraints that many times 
forced U.S. firms to locate in Mexico as a condition of exporting to 
the Mexican market, firms were able to rationalize their production on 
a North American basis. That frequently meant relocating some of their 
Mexican production to U.S. plants because they were now free to export 
to Mexico from the U.S. without being subject to artificial import and 
local production constraints.
    That effect played out in numerous investment decisions. One 
particularly striking example was Chrysler's decision to build one of 
its hottest selling vehicles, the Durango, in Delaware. Without the 
constraints of Mexican trade barriers, Chrysler was free to locate 
production in the United States and still take advantage of higher 
demand for sport utility vehicles in all three markets--the United 
States, Canada, and Mexico.
    NAFTA has improved the prospects for parts makers as well as 
original equipment manufacturers like Chrysler. For example, without 
NAFTA, automotive parts maker TRW would have moved its manufacturing 
facility in Lebanon, Tennessee, to Mexico. Instead, NAFTA's cuts in 
tariffs and local content requirements allowed TRW to keep production 
in Tennessee and to add 200 jobs since NAFTA's passage.
    The growth in exports of agricultural equipment to our NAFTA 
trading partners reflects a similar success story. Our exports of such 
equipment to other NAFTA countries have exceeded growth to the rest of 
the world. From 1992 to 2002, U.S. agricultural firms increased exports 
46 and 93 percent to Canada and Mexico respectively while exports to 
the rest of the world grew 37 percent.
    Prior to NAFTA's entry into force, U.S. firms faced an average 
tariff of 12% on exports to Mexico. Now U.S. exporters enjoy duty-free 
access while competitors from Japan and China face tariffs of up to 23 
percent. As a result of this advantage, U.S. exporters have captured 
more than three-quarters of the Mexican market.
    The benefits of that growth extend down through the entire U.S. 
supply chain. For example, Elliott Tool Technologies, a small business 
in Dayton, Ohio, and a supplier to Caterpillar, Inc. is one of many 
NAFTA beneficiaries. ``NAFTA certainly has helped us in marketing and 
selling Elliott tube tools into Mexico,'' said Jim Ireton, vice 
president for international sales and marketing.
    The same holds true for U.S. chemical firms. Mexico and Canada are 
the first and third largest export markets, respectively, for American 
chemicals. The industry, encouraged by opportunities offered by NAFTA 
trade rules, continues to focus on expanding NAFTA markets by upgrading 
investment and marketing plans, especially with regard to plastics, 
solvents, thinners, and other chemical preparations.
    For example, Eastern Color and Chemical, of Providence, Rhode 
Island, supplies dyes and chemicals to the textile and leather industry 
in Mexico, which in turn exports textiles, apparel, and footwear to the 
United States and Canada. According to technical manager Fred Savell, 
business has been expanding in recent years, and the company 
anticipates doing even better in the next few years.
    U.S. firms exported a total of $53.6 billion in environmental 
technology products and services in 2002, including $11.2 billion to 
Canada and $7.7 billion to Mexico. Together, our NAFTA partners account 
for more than one-third of total U.S. exports of environmental 
technologies. Before NAFTA, U.S. exports of environmental technology 
products to Mexico and Canada faced tariffs up to 35%. Today, most U.S. 
exports in this sector to Canada and Mexico receive duty-free 
treatment. For example, U.S. exports of steam-generating watertube 
boilers to Mexico enter duty free, while those from South Korea and 
Taiwan are subject to a 22% tariff. U.S. firms also benefit from NAFTA-
driven increased government transparency in environmental laws and 
regulations in Mexico.
    Our NAFTA partners account for twenty-nine percent of total U.S. 
exports of information and communication technology (ICT) and are the 
first and second largest export markets. Exports to Mexico increased by 
239% from 1992 to 2002. In addition, closer trade and investment ties 
due to NAFTA allow U.S. ICT firms easier access to Canada's and 
Mexico's growing computer markets, which have more than doubled in size 
since 1992 to $12.7 billion combined. The packaged software market 
alone in Canada and Mexico was worth $4.5 billion in 2002, triple the 
pre-NAFTA market size. Non-tariff barrier elimination was also 
important for the ICT industry, which realized NAFTA benefits through 
more transparent commercial dealings, removal of investment barriers, 
and the opening of Mexico's lucrative government procurement market for 
U.S. suppliers. This sector also benefits from stronger intellectual 
property rights protection following NAFTA, including increased 
protection of integrated circuit layout designs and trade secrets.
    ``Each year we continue to find innovative ways to use NAFTA as a 
means to serve our customers and remain price-competitive,'' said Kitty 
Krishnamurthy, vice president of the Panasonic facility in Troy, Ohio. 
NAFTA is crucial to the competitiveness of Panasonic's color television 
cathode-ray-tube production in Troy. It provides Panasonic's customers 
a source of duty-free materials, ease of logistics planning among 
border factories, and lower operating costs along the border trading 
zone.
    NAFTA's elimination of virtually all tariffs on medical equipment 
has helped to increase U.S. exports to Canada and Mexico. Today U.S. 
medical equipment firms experience no significant tariff barriers in 
either country. Before NAFTA, Mexican importers of U.S. medical 
equipment paid nearly $100 million annually in tariff costs, including 
tariffs as high as 20 percent on some products.
    Today, U.S. firms enjoy nearly duty-free access to these markets. 
U.S. exports of dental and medical chairs and parts to Mexico enter 
duty free, while those from Japan are subject to a 22 percent duty. 
Similarly, U.S. exports of ultrasonic scanning equipment enter Mexico 
duty free, while Japanese and South Korean exporters are subject to a 
17 percent tariff. NAFTA also eliminated several nontariff barriers in 
Canada and Mexico. Today U.S. exporters benefit from uniform customs 
procedures, greater transparency in standards and government 
procurement, and stronger protection for trade secrets that have 
commercial value such as product processes, formulas, and customer 
lists.
    Lower NAFTA tariffs on pharmaceuticals have fostered greater 
choices for the inputs needed for pharmaceutical production. A world-
class patent regime in Mexico, bolstered by NAFTA's patent provisions, 
gives innovators a favorable environment to launch new compounds. U.S. 
pharmaceutical exports to Canada and Mexico combined increased 144 
percent from 1992 to 2002--greater than the 125 percent increase in 
exports to the rest of the world.
    Wyeth Pharmaceuticals, of Princeton, New Jersey, has benefited from 
NAFTA driven tariff elimination, stronger patent laws and enforcement, 
and transparency in government decision-making in Mexico and Canada. 
Wyeth now enjoys increased flexibility in sourcing bulk intermediate 
inputs and faster approval of new products than previously existed.
    NAFTA has provided U.S. processed food and beverage firms with 
increased flexibility. U.S. food companies have increased options 
regarding how to meet the ``just in time'' delivery requirements of 
customers, particularly those along the border. For example, U.S. 
direct investment in Mexico's processed food industry--largely in snack 
foods, vegetable oils, meat and poultry, and confectionery products--
has quadrupled since 1987. U.S. malt beer exporters enjoy duty-free 
access to Mexico, while exports from competitors are subject to a 28 
percent tariff. Since 1993, malt beer exports to Mexico have increased 
185 percent. NAFTA has also addressed some nontariff barriers that are 
important to the processed foods and beverages industry, including 
Mexico's regulations for product testing, certification, and labeling.
    NAFTA has enabled Orion Food Systems Inc., of Sioux Falls, South 
Dakota, to increase sales and profits across Canada. Orion exports the 
majority of products needed to open and maintain its fast food 
restaurants across western Canada. Its increased market presence in 
Canada has meant increased exports of pizza dough and pizza sauce, both 
manufactured in Sioux Falls. Orion's exports to Canada have quadrupled 
since 1998.
    NAFTA eliminated or significantly reduced all tariffs in scientific 
equipment for U.S. exporters. Now U.S. scientific equipment exporters 
enjoy duty-free access to Mexico while exporters from competing 
countries such as China and Japan face tariffs up to 23 percent. For 
example, U.S. exports of instant cameras and photographic equipment 
enter Mexico duty free while Chinese and Japanese goods are subject to 
a 23 percent tariff. U.S. exports of precision instruments such as 
manostats and voltage current regulators enter Mexico duty free, while 
Japanese and South Korean exports are subject to tariffs as high as 30 
percent. This means that our exporters have a significant price 
advantage when selling in the Mexican market, enabling them to capture 
66 percent of this import market. NAFTA standardized customs procedures 
and increased transparency in both standards and government 
procurement, which significantly helped manufacturers in this sector.
    NAFTA has had a positive impact on the increasingly significant 
service industries. NAFTA eliminated all of Mexico's restrictions on 
market share in the banking sector and permits U.S. investors to 
participate in the Mexican banking system through the acquisition of 
existing banks or the establishment of U.S.-owned and controlled 
subsidiaries. NAFTA allows U.S. investors to participate in the Mexican 
insurance market via acquisitions, joint ventures, or subsidiaries. 
Some 30 foreign-owned insurance companies now operate in Mexico, over 
half of which are owned by U.S. firms. NAFTA also eliminated Mexico's 
restrictions on purchases by its citizens of U.S. life and health 
insurance when in the United States.
    NAFTA eliminated several important barriers to U.S. services trade. 
NAFTA established the principle of ``national treatment'' for services 
trade by which governments must treat NAFTA members' services firms as 
favorably as local firms. NAFTA prohibited local presence requirements 
and quantitative restrictions that discriminate against non-local 
service providers. NAFTA also called for the elimination of citizenship 
and permanent residency requirements for professional service providers 
of another NAFTA partner. In 2002, U.S. professional services exports 
(e.g., accounting, legal and medical services) to Canada and Mexico 
reached $4 billion.
    Increases in NAFTA-related assembly operations have enabled Netlink 
Transaction Services, of Victor, New York, to increase exports of 
cross-border payroll and banking services. This ``virtual banking 
services provider'' has increased the number of Mexican assembly plant 
workers in Mexico's border cities for whom it provides banking services 
from 6,000 to more than 100,000 over the past few years.
    Although not specifically a component of NAFTA, passenger travel is 
the single most important service traded between the United States and 
our NAFTA partners. The substantial growth in NAFTA commerce and 
investment has fueled the demand for regional passenger travel. It 
accounted for more than one-third of total U.S.-NAFTA private service 
trade in 2002. During 2002, Canadian and Mexican travelers to the 
United States spent $11.8 billion, or 18 percent of all spending by 
foreign visitors.
    While many of the sectors mentioned above suggest unqualified 
success, it is also worth examining the facts regarding sectors of the 
U.S. economy that have undergone the most significant economic 
adjustment over the intervening 10 years since NAFTA went into force. 
The most prominent example is that of textiles and apparel.
    There is little doubt that the textile and apparel industry has 
faced considerable challenges for many years despite benefiting from 
protective quotas and significant subsidies (e.g., payments to textile 
makers through the cotton subsidy program to offset the higher cost of 
purchasing U.S. cotton). Indeed, the 40 years of quotas left the 
industry in a highly fragmented state, unable to gain economies of 
scale that would allow it to compete on a broader scale for world 
markets.
    The NAFTA had two principal effects for our textile and apparel 
industry, both beneficial, contrary to what many of NAFTA's most 
vociferous critics maintain. The first is that our NAFTA partners now 
purchase nearly half of our exports of textiles and apparel products. 
The second was the opportunity offered U.S. producers to optimize 
production and manufacturing throughout the North American market.
    U.S. exports in the sector, from cotton to yarn to fabric, 
benefited particularly from the NAFTA ``yarn forward'' rule of origin. 
By creating a preference for the use of U.S. fiber and fabric among 
Mexican apparel manufacturers, NAFTA expanded the potential customer 
base for American firms and lowered their average cost per unit by 
allowing them longer production runs. In addition, the NAFTA rules 
encouraged production-sharing arrangements that allowed U.S. firms to 
compete on a larger scale.
    Those beneficial effects account, in part, for the improved 
performance of the U.S. textile industry in the years immediately 
following NAFTA's signing. From 1993 to 1997, the value of textile 
industry shipments grew by 13 percent. Apparel produced in Mexico, 
using U.S. and/or Mexican fiber and fabric remained highly competitive 
not only in the U.S. market, but even against Asian products in foreign 
markets.
    The significant downturn in the textile industry's fortunes 
coincided with the onset of the Asian financial crisis in 1997. The 
crisis resulted in a radical realignment of exchange rates and trade 
flows, particularly in the case of textiles and apparel. To remain 
competitive themselves in the highly competitive world of retailing, 
retailers shifted their sourcing back toward Asia in that timeframe. 
Without competitive domestic apparel customers, U.S. textile shipments 
began to fall in the face of an onslaught of lower-priced Asian 
apparel.
    The impact of the Asian financial crisis was compounded by fashion 
in another sense--in this case, the fashion in our own capital markets 
that favored investments in a variety of high technology ventures in 
the late 1990s. It became exceedingly difficult to obtain financing for 
the expansion of any traditional manufacturing enterprise, the ``bricks 
and mortar'' parts of the economy that did not show the same potential 
for growth that many on Wall Street calculated for initial public 
offerings of tech stocks.
    As we now know, a fair share of those investments went bust. In 
addition, the boom of the late 1990s was fed by what we now know were 
inflated income statements. In either event, however, the result was 
the same from the perspective of the textile industry and many other 
traditional U.S. manufacturers. Without the capital to finance 
expansions that would allow them to operate on a sustainable scale, 
their competitive position weakened.
    With the general slowdown in the U.S. and world economies in 2000, 
domestic textile manufacturers were forced to adjust. Those U.S. 
textile companies that had invested in Mexico and built modern, state-
of-the-art facilities for long runs of bottom-weight fabrics, such as 
twill and denim, faced a difficult choice. And that choice frequently 
meant that their production and employment cutbacks occurred 
disproportionately in their older, less efficient U.S. operations.
    My point in focusing on the textile and apparel sector at length is 
to explain why the numbers that many of NAFTA's most ardent critics 
cite, particularly as to job losses, have less to do with the direct 
effect of NAFTA on the industry's prospects than to the failure to take 
full advantage of what NAFTA had to offer. Many in the U.S. textile 
industry viewed NAFTA as a means of survival, rather than envisioning 
the agreement as a vehicle for growth.
    For example, the great preponderance of the yarns and fabrics 
exported to Mexico has been used to make apparel in export processing 
zones, which is sold to existing customers in the United States, not to 
new customers in Mexico. Moreover, textile companies did not focus on 
making Mexico an export platform to markets outside the Western 
Hemisphere, even after conclusion of the EU-Mexico Union Free Trade 
Agreement in 2000 created new export opportunities in Europe for 
textiles and apparel manufactured in Mexico.
    That is not to say that we are not concerned about job loss. Nor 
will we, as some in the capital markets have, simply write off American 
manufacturing, including in the textile sector. Quite the contrary, if 
anything, my recent experience attending a series of roundtables across 
the country with American manufacturers as part of the Administration's 
Manufacturing Initiative suggested that the United States retains its 
basic strength in manufacturing. We tend to forget that, standing 
alone, our manufacturing sector today would be the 5th largest economy 
in the world--larger than China's economy as a whole.
    Nonetheless, the time I spent with our manufacturers, including 
those in our textile and apparel industry, suggests to me that we will 
not address the challenges we face in making American manufacturing 
globally competitive if we take refuge in comforting arguments that lay 
the blame for economic adjustment at the door of particular trade 
agreements like NAFTA, and fail to address the far more fundamental 
issues involved.

          III. NAFTA AND MEXICAN ECONOMIC AND POLITICAL REFORM

    As I noted, I have had the opportunity to follow economic and 
political developments in Mexico since I served there as a junior 
Foreign Service Officer some twenty-five years ago. The Mexico I knew 
then was remarkably different than the Mexico I return to now. The most 
visible changes relate to the economic benefits that have flowed from 
NAFTA. For instance, the brand new Jetta on the streets of Mexico City 
has supplanted the beat up Volkswagen Beetle. U.S. franchises from 
million dollar hotel chains to the ubiquitous fast food chains, and 
most recently even Starbucks, fill the streets of even the smallest 
towns.
    When I worked in Mexico, the Mexican government owned more of the 
economy by some measures than the Soviet government owned in the way of 
Russian assets. The economy was so tightly controlled, that otherwise 
honest businessmen were forced to operate clandestine auto repair 
shops, rather than become trapped in the endless red tape that attended 
opening a business legally. The only question was to whom you paid the 
``mordida,'' not whether it would be paid. And, the Partido 
Revolucionario Institucional (PRI) served basically as a large 
political brokering mechanism among the various contending economic 
interests from the well-to-do and well-connected of Mexico City's 
intellectual elite to the ejiditarios who pressed their land claims on 
the government to the union leaders that ran Pemex in all but name.
    By contrast, today, Mexican businesses thrive and attract business 
from both sides of the border. If you visit Monterrey, for example, you 
have to look closely to realize that you are not in south Texas. And 
even then, you can be easily confused because even the license plates 
on the cars offer a lesson in geographic proximity and economic 
interaction. What was a closed economy, heavily dependent on 
subsistence agriculture and high industrial tariffs, is now a vibrant, 
modern economy.
    When I served in Mexico, no one would have believed that less than 
a quarter century later Mexico would be a member of the Organization 
for Economic Cooperation and Development (traditionally viewed in 
Mexican political circles of the time as the ``rich man's club''). Nor 
would anyone have believed that Mexico would not only have joined the 
General Agreement on Tariffs and Trade, but be one of the leaders in 
the world trading system pressing for further liberalization as 
witnessed by its hosting the recent World Trade Organization 
ministerial in Cancun.
    Even more dramatically, and I will return to this point later, no 
one would have expected that the Mexican president would represent a 
party other than tie PRI. The PRI had already been in power for about 
fifty years when I served there. Who would have guessed that a former 
Coca-Cola executive from the PAN would sit in Los Pinos--the Mexican 
equivalent of the White House--twenty-five years later? And, who would 
have expected that he would face considerable opposition by contending 
parties in the Mexican congress?
    My point in offering those personal reflections on the changes I 
have seen in Mexico over the past quarter century is simply to say that 
macroeconomic numbers and sector-specific details cited above tell part 
of the story of NAFTA. The Mexican economy grew in the past decade, as 
did many other economies in this hemisphere. But Mexico's experience, 
because of NAFTA, goes far deeper than simply increasing trade and 
economic growth.
    Perhaps the best comparison is one to which I alluded earlier. 
Having said that trade is really about the higher economic growth that 
flows from more productive resource allocation, how does Mexican growth 
in the 1980s before Mexico undertook many of the domestic economic 
reforms that prepared the way for NAFTA compare with its growth in 
1990s, which includes the period after NAFTA was signed? In the event, 
Mexico grew an average of 3.4 percent per year in the 1990s, while 
growth averaged only 1.9 percent per year in the 1980s.
    NAFTA, as well as the domestic economic reforms that it cemented 
into place, also help explain how Mexico recovered more quickly from 
the economic crisis in 1994 than it did from the debt crisis it faced 
in the early 1980s. Mexican GDP reached a peak in early 1982 at the 
onset of the debt crisis that it did not reach again until early 1988, 
nearly six years later. By contrast, the economic crisis Mexico faced 
in the mid-1990s lasted only 6 to 9 months, and six years later the 
economy was up over 30 percent.
    The change in the economic and political relationship between the 
United States and Mexico, which NAFTA fostered, contributed 
significantly to those outcomes. Tying the Mexican economy more 
intensely through trade with the United States created a partnership 
that was able to weather the storm better than ever before. Former 
Treasury Secretary Robert Rubin's recent book, ``In an Uncertain 
World,'' recounts the story. According to Secretary Rubin, President 
Clinton recognized quickly the potentially negative impact on our 
economy that could come from allowing the Mexican economy to slip 
further into crisis and chose, unlike in 1982, to loan Mexico necessary 
funds to stabilize its economy.
    That loan was grounded in our own self-interest, but represented 
considerably more than that--it represented an appreciation of the 
significant effort that Mexico had taken to put its economy on a 
sounder footing and demonstrated the U.S. commitment to its newest free 
trade partner. Mexico's ability to pay back that loan even before it 
was due was a demonstration of how NAFTA could help restore investor 
confidence and bring an early end to the financial crisis. Our close 
economic relationship continues to foster internal changes in Mexico 
partly because of the market competition in goods and services and 
partly because government has responded to the needs of the economy to 
be more flexible and competitive. This has created a much more stable 
economy to our south and our second most important trading 
relationship.
    President Salinas' vision for a free trade agreement when he 
proposed it in 1992 was doubtless about creating the kind of economic 
relationship I just described. But his interest in seeking what became 
NAFTA was more than simply tariff reduction. He saw the agreement as a 
tool toward greater economic and political opening--as part of a 
broader transformation of Mexico.
    President Salinas presented an opportunity and, together with our 
Canadian friends, we seized that opportunity to transform our economic 
and political ties. What flowed from that negotiation affected the 
economics in many ways, some of which I have outlined above. But, in my 
view, the far more profound impact of NAFTA and the various reforms 
undertaken first by President Salinas and reinforced later by President 
Zedillo were on politics in Mexico.
    I have often made the argument that freedom is ultimately 
indivisible. While we often refer to it in its various guises as 
economic or political freedom, in the end it is simply freedom. In the 
United States, we live with such freedom that we frequently forget the 
extent to which dividing the economic interests of the individual from 
those of the state sows the seeds of political pluralism.
    The corollary is that economic opening often leads to political 
opening and Mexico is one of the best examples of that theory. The 
expectations created by the economic opening, including steps as simple 
as allowing people to open a tire-repair shop in Tijuana, lead the same 
people to seek political reforms and to seize the political opening 
that comes with them. That process culminated with the election, in 
2000, of Vicente Fox, the first non-PRI president in more than seventy 
years.
    While NAFTA was not the only cause, just as held true on the 
economic side, NAFTA was a significant contributory factor. The 
individual business owner was no longer obliged to pay the local PRI 
political machinery for his or her right to stay in business. There was 
a market across the border that offered more than economic freedom in 
the end.
    Having said that, there is also little doubt in my mind that the 
process of reform in Mexico remains incomplete. NAFTA has enabled 
Mexico to make considerable progress in modernizing its economy so it 
can compete in the highly competitive North American market. But as in 
our country, not all sectors have been able or willing to take full 
advantage of these opportunities.
    The most poignant example is the agricultural sector in Mexico. It 
is perhaps the best indicator that reform has not gone far enough to 
make Mexico fully competitive in North America. Even in this sector, 
there have been gains, especially in the production of fruits and 
vegetables. Mexico has a competitive advantage over the United States 
and Canada because of its climate and the intensive use of labor in 
such products. Moreover, fruits and vegetables can be grown efficiently 
in small plots of land and thus their production can be accommodated in 
the smaller farms mandated by Mexican legislation. I think this shows 
that the opportunities to export offered by NAFTA enabled certain 
members of the agricultural sector to prosper in spite of Mexican 
regulations.
    On the other hand, producers of such staple crops as corn and beans 
cannot compete against highly efficient mechanized agricultural 
producers in the United States, with or without the benefit of 
subsidies. The solution is for Mexico to make the needed reforms to 
enhance its competitiveness in those sectors where it has a comparative 
advantage, and not through measures such as the imposition of new taxes 
to hinder the import of products where the United States has a 
competitive advantage such as high fructose corn syrup. Not 
surprisingly, the greatest opposition to the NAFTA comes from the 
agrarian sector--the sector that was least well prepared to compete 
when the remaining tariff barriers fell in 2003.
    But much more can and should be done in the agricultural sector and 
elsewhere if Mexico is to fully capitalize on the opportunities of 
NAFTA. Continued reform will ensure that capital flows to the areas 
where Mexico is most competitive. As you may know, needed economic 
reforms in the labor, fiscal, and energy sectors stalled in a divided 
Mexican Congress last December. It's during such times that some 
Mexicans may yearn for old style, one-party executive efficiency. But 
that is also exactly when the political leadership needs to step 
forward and do what is right for the country, rather than seeking 
short-term political advantage.

                     IV. COMMERCE DEPARTMENT'S ROLE

    I'd like to be able to tell you that NAFTA is problem-free. While 
it is true that the vast majority of trade crosses our borders swiftly 
and ``just in time,'' there are instances when the NAFTA does not work 
as well as it should. Sometimes individual customs agents misunderstand 
the rules, sometimes exporters do not fully comply with the regulations 
imposed by one of our partners. And unfortunately, sometimes our 
partners implement regulations or policies that we believe are 
inconsistent with the agreement.
    In the vast majority of cases, they do comply and your constituents 
can take advantage of all the benefits of the NAFTA. But when there are 
problems, Commerce is steadfast in its commitment to ensuring 
compliance. Our commitment to compliance is no stronger anywhere than 
it is with respect to the NAFTA. Nearly two years ago, A/S Bill Lash 
created a ``NAFTA Compliance Team'' to focus exclusively on the NAFTA. 
This team, working with staff from elsewhere in Commerce and other 
executive branch agencies, uses its knowledge and understanding of the 
NAFTA and its familiarity with the Canadian and Mexican governments to 
identify and resolve instances of noncompliance or impediments to 
market access on behalf of U.S exporters.
    We have frequent and intensive discussions with our Mexican and 
Canadian colleagues at all levels of the government from Secretary 
Evans down to the staff level. The team first analyzes the complaint 
and then develops a strategy for resolution. The appropriate official 
then meets with the appropriate counterpart to raise the issue and 
request resolution. As one who often delivers the message to my 
Canadian or Mexican counterparts, I can assure you that the information 
is solid and the path to resolution clear. I'm proud to tell you that 
many of these issues are resolved promptly and successfully as a result 
of our team's work. In the event that we cannot reach a solution 
through discussions, we turn to our colleagues at USTR to pursue 
dispute settlement through the NAFTA or WTO procedures. We haven't had 
to resort to formal dispute settlement often, but we will do so 
whenever we feel it necessary.
    Let me highlight a couple examples to give you an idea of the 
difficulties firms sometimes face and to describe how we seek to 
resolve them. In May 2002, for example, the NAFTA Compliance Team 
assisted U.S. companies in resuming exports for 54 U.S. beer shipments 
stopped at the U.S./Mexico border, in addition to subsequent 
shipments--preventing lost sales of over $1 million dollars. The Team 
determined that Mexican Customs was enforcing changes to Mexican import 
permit requirements not previously enforced. After the companies 
submitted the correct documentation, they were told it would take 
between 30-45 days to clear any of their shipments. The Team contacted 
their Mexican Customs counterparts and the shipments were resumed 
within a week.
    Commerce was instrumental in protecting pharmaceutical patents in 
Mexico. The Mexican Health Ministry granted marketing approval for 
pharmaceuticals without first checking for valid patents. Mexico also 
allowed Mexican interests to rely on the test data submitted by U.S. 
firms. Commerce efforts were key in having Mexico publish a decree that 
resolved these issues, resulting in the protection of pharmaceutical 
patents valued in the millions of dollars.
    The Canadian Parliament had been considering amendments to 
legislation that would have allowed for a compulsory license for the 
retransmission of television signals over the Internet. The U.S. and 
Canadian copyright industries, as well as the U.S. Government, were 
very concerned about the possible negative effects that this 
legislation would have on right holders. The Department of Commerce in 
tandem with the Department of State, USTR, and the Copyright Office, 
actively pursued several different avenues of communication with the 
Canadian Government in order to voice our concerns and encourage them 
not to pass the legislation. The bill was amended to carve Internet TV 
retransmission out of Canada's compulsory license regime. The bill 
received Royal Assent to become law in December 2002 with the Internet 
exemption order in place.
    Let me make two final points with respect to NAFTA compliance. 
First of all, I want to stress that the vast majority of our trade is 
unimpeded. We could not have realized the gains nor the absolute 
volumes were this not the case. Second, we are ready and willing to 
help your constituents address problems they may encounter. The 
challenge is often in learning about those problems. So please continue 
to direct your constituents to us. We cannot resolve every problem, but 
we have an impressive track record of solving the problems brought to 
our attention.
    In addition to the work of the NAFTA compliance team, the 
International Trade Administration has developed an interactive online 
tool available on www.export.gov to help guide U.S. exporters in 
filling out the North American Free Trade Agreement (NAFTA) Certificate 
of Origin. The NAFTA Certificate of Origin is used to show customs 
officials that your product qualifies for NAFTA and is therefore 
entitled to NAFTA's preferential tariff rates.
    Because filling out the NAFTA Certificate can be difficult, ITA 
developed this interactive tool to provide U.S. exporters and 
manufacturers with line-by-line instructions and detailed descriptions 
of terminology on the Certificate. Your constituents can contact the 
Trade Information Center at 1-800-USA-TRADE for assistance.
    Another important area in which the Department is actively involved 
that will help build on the successes of NAFTA is the U.S.-Mexico 
Partnership for Prosperity (P4P). This presidential initiative is 
designed to bring the benefits of the NAFTA to those parts of Mexico 
that have not fully benefited from the agreement.
    The reason behind this work is not simply that we are trying to be 
good neighbors, although that is one of the animating motives. One of 
the reasons for the gains in U.S. exports to the NAFTA countries in the 
past ten years has been the growth of the Mexican economy and the 
commensurate increase in demand for U.S. goods. In addition, continued 
growth in the Mexican economy and creation of higher paying jobs, gives 
Mexican citizens a reason to stay home instead of feeling compelled to 
seek employment north of the border. By working with our Mexican 
colleagues, as well as counterparts from State, Treasury, SBA, AID, 
IDA, HUD, and other agencies, we are helping increase that demand.
    In June, our governments will host the second P4P entrepreneurial 
workshop. The focus of this event is to promote networking, especially 
among small and medium-sized enterprises in areas such as information 
technology, housing construction and finance, entering the global 
supply chain, and infrastructure.
    This event will offer an opportunity for our small businesses to 
make contacts and identify opportunities to sell their products to this 
growing market of 100 million consumers. The benefits we negotiated 
under the NAFTA will provide them with advantages over their foreign 
competitors they can use to increase sales and create jobs here in the 
United States. We are very excited about the opportunity to build on 
the success of last year's event in San Francisco. I want to talk a bit 
further about the Partnership in a few moments, but at this point I 
simply want to urge you to encourage your constituents, particularly 
small business representatives, to make plans to join us in 
Guadalajara, June 26-29. Additional information is available on the 
official P4P Web site, www.p4pworks.org
    v. nafta's next decade--focus on north american competitiveness
    Before concluding, I want to take just a few moments to suggest 
where we are going now after a very successful first decade of North 
American free trade. As I hope my comments to this point have shown, 
we've accomplished a great deal. As the world continues to be a 
smaller, and more interconnected place, we need to use the advantages 
of the NAFTA to ensure that we retain our high standard of living for 
all of our citizens.
    In other words, we need to pursue measures to maintain and enhance 
competitiveness. The best way to do that, in our view, is not to return 
to the past era of high tariffs and intricate non-tariff barriers to 
trade, but to continue to pursue free trade. Our exporters have already 
proven their ability to compete in North America--the most competitive 
market in the world. What we want to do, working with our Mexican and 
Canadian colleagues, is ensure that they have access to new markets.
    North America can be a platform for export to the rest of the 
world. We make high quality products and we do so efficiently. Our 
efforts to ensure, for example, that China complies with its WTO 
commitments are all about ensuring that our exporters have the same 
type of access abroad that foreign firms have in our markets. I've met 
with my colleagues from Canada and Mexico, as has Secretary Evans, to 
raise our concerns and propose joint solutions. I am pleased to report 
that we have a common view and approach to trade outside of North 
America.
    We are also starting to think more broadly about competitiveness 
within the Partnership for Prosperity. Under P4P, American and Mexican 
companies have sponsored concrete projects to expand access to capital, 
to share technical expertise, and ultimately, to build capacity for 
future growth. One program has trained more than 70,000 primary and 
secondary school teachers in Mexico to develop students' technological 
skills. Another enables low-income families to buy higher-quality 
construction materials and receive technical assistance in 
homebuilding.
    But the Partnership is not just about giving Mexico a hand or 
handout. It really is about our own competitiveness. Through the 
Partnership we are creating opportunities for workers and demand for 
products. We are also promoting a more competitive platform from which 
we can export to the rest of the world. A good example is the 
Administration's Manufacturing Initiative, which could not have been 
written without reference to NAFTA because our economies are 
inextricably linked. So even when we talk about creating an environment 
in the United States conducive to increased investment, it has to be 
done in the context of regional competitiveness. Mexico has to be part 
of the equation as well.
    That is why we continue to meet with Mexican officials to offer our 
assistance and our support for the reforms that the Fox Administration 
has proposed. At the upcoming workshop in Guadalajara, my Mexican 
colleagues and I, along with counterparts from other USG agencies 
including State and SBA, will meet with business community 
representatives to hear their concerns and, I hope, their suggestions 
for steps the governments can take to enhance our competitiveness.
    Secretary Evans often observes that governments can establish the 
conditions for economic expansion, but that it is up to the business 
community to take advantage of the opportunities. This is absolutely 
true in the case of the NAFTA and North American business. I mentioned 
the auto industry earlier as an example of integration made possible by 
the NAFTA.
    A second example is steel. This industry has worked in the North 
American context to recognize and leverage common interests, and worked 
to improve its world position at their urging, the three governments 
last year agreed to create a North American Steel Trade Committee that 
met for the first time last November in Mexico and will meet again next 
month.
    This industry-government body is, in my view, the wave of the 
future for NAFTA. Industry has identified some steps that can help 
improve its ability to compete and now our governments will sit down 
with them to determine what is possible. I expect that other sectors 
may also find that they can accomplish more by recognizing common 
concerns and objectives and pursuing them jointly. The NAFTA Vice-
Ministers, for example, have begun consideration of joint efforts 
within the textile industry. While nothing concrete has yet been agreed 
upon, I suspect this is the beginning of a trend.
    Longer term, I foresee the need to promote the fact that the 
highest quality goods in the world are produced not just in America, 
but also in North America as a whole. As I can attest from my own Dodge 
Durango, that quality is inherent in the entire supply chain in the 
North American automotive sector, whether the parts and components come 
from the United States, Canada, or Mexico. By harnessing the 
competitive spirit found in this part of the world, NAFTA not only 
remains the most powerful economic entity in the world, but also can 
advance that position even in light of increasing competition from 
Asia.
    In conclusion, Mr. Chairman, I want to reiterate that NAFTA has 
been a success. The impact on the U.S. economy has been broad, deep, 
and overwhelmingly positive. Our standard of living, and that of 
Canadians and Mexicans, is higher than it was in 1993. North American 
consumers have greater choice and pay lower prices for almost 
everything they purchase. The competition created by the elimination of 
tariffs and non-tariff barriers in North America has made our producers 
more efficient and productive.
    As we travel the world, we will see American products in stores and 
homes. The ability to penetrate those markets is partly a result of the 
policies encouraged by the Congress and implemented by the Executive 
branch. But the ability to produce goods people want to buy at a price 
they want to pay is a result of the NAFTA and the U.S. business 
community's decision to take advantage of the opportunities that stem 
from it.
    NAFTA is not perfect. We will work tirelessly to ensure that our 
exporters get the access to our two largest markets to which they are 
entitled. We will be mindful of the lessons we have learned through 
NAFTA as we negotiate future agreements. But let me leave you with one 
final thought. We've done something in North America that has not been 
replicated anywhere else in the world. Our people are better off than 
they were before NAFTA entered into force. And we stand at the 
beginning of NAFTA's second decade where I am certain the promise will 
continue to be realized and our economies and societies will grow in 
ways we cannot now predict.
    Thank you.

    Senator Hagel. Secretary Aldonas, thank you.
    Secretary Wayne.

  STATEMENT OF HON. E. ANTHONY WAYNE, ASSISTANT SECRETARY OF 
  STATE FOR ECONOMIC AND BUSINESS AFFAIRS, U.S. DEPARTMENT OF 
                             STATE

    Mr. Wayne. Thank you very much, Mr. Chairman, Senator 
Coleman. It's a pleasure to be before you today and to have 
this opportunity, on the 10th anniversary of the enactment of 
NAFTA, to talk about some of its effects and the lessons we've 
learned.
    I think you'll find all of us in this first panel agreeing 
that NAFTA has brought many benefits to the American people and 
to our neighbors. It has helped to transform our economies, to 
create partnerships that go well beyond economic prosperity, to 
giving each partner a much greater stake in enhancing the 
national security of each other, and, thus, in protecting the 
lives of American citizens.
    Overall, of course, NAFTA's success stems, in a good part, 
from its focused objectives: to eliminate, progressively, 
tariff and non-tariff barriers, to trade in goods and services, 
to establish clear rules for investment, to strengthen 
intellectual property rights, and, in the process, to create 
effective dispute settlement mechanisms.
    As you well know, Canada and Mexico are now our No. 1 and 
No. 2 trading partners, and the value of the goods and services 
we trade, the numbers of people crossing the border each day, 
have climbed to unprecedented levels.
    Since Congress reauthorized the President's trade 
negotiating authority in 2002, the administration has launched 
bilateral and sub-regional FTA negotiations with 15 countries. 
Eight have been concluded, and we've announced our intention to 
negotiate with six more nations. We believe that these FTA's, 
which are, in many ways, inspired by the NAFTA experience, can 
create significant openings in markets that are now blocked by 
obstacles to U.S. exports.
    The larger issue is not just about trade, however. Free 
trade agreements support U.S. goals by encouraging needed 
economic reforms, as Under Secretary Aldonas pointed out in the 
case of Mexico. They promote economic growth, and they promote 
diversification. They require good governance and improved 
transparency, and they help to introduce the flexibility and 
the competitiveness which is needed to sustain development.
    Since NAFTA, our trade agreements include provisions on 
transparency, on labor rights, on environmental protections, on 
financial services, on government procurement, on investor 
protections, on dispute settlement, on intellectual property, 
and on a host of other key issues, in addition to the 
traditional market-access provisions. By getting host 
governments to confront what are often very politically 
sensitive issues, these trade agreements encourage reforms, 
which also, in turn, promote sustainable development.
    Important benefits that have flowed from NAFTA include, of 
course, the strong growth in foreign direct investment, as you 
pointed out, Mr. Chairman. They include greater efforts to 
protect the environment. They include new provisions that seek 
to help improve the working conditions and the labor--and the 
living standards of laborers. But, to be candid, the mechanisms 
within NAFTA to protect the environment and improve the working 
conditions were never intended to solve all the forms of 
environmental degradation or all the labor-related problems. 
But what they do do is, they help foster greater public 
awareness and participation. As free trade helps economies 
grow, that growth helps middle-class societies to become larger 
and stronger. And these new societies demand higher standards 
of openness, of performance, and of transparency from their own 
governments.
    NAFTA has also helped strengthen our national security. The 
extensive interagency ties between our governments, developed, 
in large measure, as a result and flowing from NAFTA, were 
instrumental in allowing us to craft quickly the smart borders 
accord with Canada and a border partnership action plan with 
Mexico, and both of those efforts right now are facilitating 
legitimate trade and travel, while working to improve the 
interdiction and investigation of illicit drugs, people, 
weapons, cash, and other materials that could potentially be 
utilized by terrorists to attack our country.
    The new ties also go far beyond our bilateral efforts. 
Whether you're in a host of international organizations--
whether it be the WTO, APEC, or OECD--the United States now 
regularly finds itself side by side with Canada and Mexico, 
working to support common policies and interests.
    Now, NAFTA is not without its problems. Some critics have 
claimed that with globalization, NAFTA would contribute to the 
U.S. industrial decline and transfer jobs out of the country. 
But a whole range of studies now seem to agree that economic 
growth in the United States has increased, as it has in Mexico 
and Canada; and most of these studies conclude that, at worst, 
NAFTA has probably been neutral in increasing or decreasing job 
growth rates. While some U.S. companies have certainly opted to 
employ lower-wage workers in Mexico and elsewhere to remain 
competitive internationally, others have significantly expanded 
their activities domestically to produce sophisticated export 
products. Overall, studies have found that export-related 
activities have led to the hiring of highly skilled and 
educated workers and, on an average, at higher wages in the 
United States. And that's also true for studies that have 
looked at the Mexican and the Canadian economy.
    There certainly remain NAFTA trade issues to be resolved, 
notably--and my colleague will note some of these in the 
agricultural sector. This is an ongoing process. The 
administration is determined, however, to utilize all the 
resources that we have at our disposal to remove these 
lingering obstacles.
    And, of course, our NAFTA partners have their own 
complaints that they raise with us. But one of the very special 
and important things about NAFTA is that we have a trade 
resolution process. All three countries have access to an 
independent, transparent system that allows expert panels to 
address objectively the merits of each country's arguments, and 
adjudicate fairly. This emphasis on rule of law continues to be 
incorporated in all of our FTAs today.
    Now, NAFTA does not exist in a vacuum, as Under Secretary 
Aldonas noted. We have to evolve. We have to establish greater 
linkages to ensure that our companies and our economy remain 
competitive in the global marketplace. There are several 
tantalizing opportunities as we look at North America. Energy 
production and trade, for example. As demands for electricity, 
natural gas, and oil rise in all three countries, we must 
ensure that energy production, shipment, and utilization is 
being done in the most efficient, environmentally friendly 
means possible, and at the least cost.
    We also want to look at infrastructure constraints, for 
example. By promoting greater integration and improvements in 
road, rail, and aviation transportation, perhaps through a full 
North American open-skies program, NAFTA can continue to spur 
solid growth and development. Coupled with the increased spread 
of telecommunications and information technology, the North 
American market can anticipate continued strong growth that 
will benefit all of our countries.
    To conclude, Mr. Chairman, I very much appreciate having 
this opportunity to speak before you about the valuable 
benefits which NAFTA has brought. While change is certainly 
disruptive--it's often disruptive in our personal lives and 
more broadly--I think there's no question that NAFTA has 
brought success. It's generated clear growth in trade and 
investment. It has reduced costs across the board for consumers 
and businesses. It has improved the quality of life by 
providing consumers with more and better choices at competitive 
prices. It has helped generate opportunities for valuable new 
partnerships among officials to enhance our security and our 
international cooperation. It has helped foster democratic and 
civil society reforms that are transforming Mexico.
    NAFTA's success has been inspirational as we seek to open 
other markets to U.S. goods, services, and influence. NAFTA's 
legacy of helping other societies to develop themselves 
embraces reforms for improved governance as well as increased 
prosperity. You can be sure that the State Department will work 
closely with my colleagues here at the table and with others 
across the government to continue to remove all the tariff and 
non-tariff barriers to our exports, while advocating strongly 
for a level playing field for American business.
    Thank you very much, Senators.
    [The prepared statement of Mr. Wayne follows:]

              Prepared Statement of Hon. E. Anthony Wayne

    Thank you, Mr. Chairman, Senator Sarbanes, and Members of the 
Subcommittee, for this opportunity to testify before the Senate Foreign 
Relations Subcommittee on International Economic Policy, Export, and 
Trade Promotion. On the tenth anniversary of NAFTA's enactment, it is a 
pleasure to be able to address the committee on the benefits this 
treaty has brought to both the American people and our neighbors. NAFTA 
has helped transform our economy while creating synergies that go far 
beyond economic prosperity, especially in enhancing our national 
security and protecting the lives of U.S. citizens. As with any trade 
liberalization initiative or other economic change, NAFTA affected some 
U.S. sectors positively and others adversely, but there is little doubt 
that on the whole, the agreement produced real net benefits for U.S. 
workers and consumers. It has also served as a model for a number of 
subsequent bilateral and multilateral free trade agreements that will 
further extend the benefits of free trade while enhancing political and 
economic reforms that are fostering stronger democracies and civil 
societies throughout the world.
    NAFTA's success has encouraged the United States to promote U.S. 
interests by negotiating a variety of free trade agreements with 
countries around the world. The Administration seeks to secure the 
benefits of open markets for American consumers, farmers, workers and 
businesses by pursuing trade initiatives globally, regionally and 
bilaterally. In doing so, the United States hopes to foster conditions 
that will help energize the economies of our trading partners and 
develop new markets for American goods and services.
    As we contemplate the benefits of NAFTA for the United States, 
Canada, and Mexico, it is important to note how different our three 
economies might look today if we had not had a free trade agreement. As 
designed, NAFTA has progressively eliminated tariffs and non-tariff 
barriers to trade in goods, improved access for services trade, 
established rules for investment, strengthened protection of 
intellectual property rights and created an effective dispute 
settlement mechanism. Although no trade agreement is perfect, NAFTA has 
been a remarkable success at meeting its target goals. A few examples 
illustrate this point.

              GOOD FOR THE UNITED STATES AND OUR NEIGHBORS

    Virtually all tariffs on manufactured goods and practically all 
tariffs on agricultural products have now been eliminated, a 
significant improvement over the previous situation, especially in the 
case of our trade with Mexico. As Canada and Mexico became our number 
one and two trading partners, respectively, the amount of goods and 
number of people crossing our borders daily has climbed to 
unprecedented levels. Although most of Canada's tariffs applied to U.S. 
goods were low even before the U.S.-Canada FTA of 1989, Mexico's 
tariffs were significantly higher before NAFTA, averaging 10%. Now, 
more than 85% of U.S. goods enter Mexico duty-free, and by 2008, all 
tariffs will be eliminated.
    The example of Mexico is dramatic: approximately sixty percent of 
the 500 million visitors admitted into the United States enter across 
the U.S.-Mexican border, as do 90 million cars and 4.3 million trucks, 
all contributing to the $638 million in trade conducted at our border 
every single day. Similarly, 70 million passengers traverse our border 
with Canada each year, along with 7 million commercial trucks, and 1.3 
million rail containers. Every one of these crossings contributes to a 
total two-way trade of $394 billion in 2003. That works out to $1.08 
billion a day.
    This surge in commerce has created new alliances and efficiencies 
in our trade relationship that help define many aspects of America 
today. Canada sends 83 percent of its merchandise exports to the United 
States and receives 70 percent of its total goods imports from the 
United States. Since NAFTA's implementation in 1994, total merchandise 
trade between the United States and Canada has grown by over 120 
percent, and when you count trade in services, the growth has been 
closer to 140 percent. Our trade with Mexico shows the same dynamism: 
trade between our countries has nearly tripled, from $81.5 billion in 
1993 to $235.5 billion in 2003, translating to an average annual growth 
in trade of 11 percent. Approximately 90 percent of Mexico's exports go 
to the United States, while 62 percent of Mexico's imported goods come 
from the United States. Thus, according to the IMF, total trade among 
the three countries has more than doubled, growing from $306 billion in 
1993 to $621 billion in 2002.
    By any measure, NAFTA has promoted export-led growth in North 
America writ large, and the benefits have been directly felt here in 
the United States. Greater, more open markets allow American companies 
to compete better in the world economy, creating new, higher wage jobs 
at home. Lower barriers to trade improve the quality of life by 
reducing consumer and producer costs and improving economic 
efficiencies. NAFTA has shown that Americans can compete--and succeed--
with workers from other countries, when given a fair opportunity to do 
so. Beyond NAFTA, opening new markets through the creation and 
enforcement of additional trade agreements enhances these benefits to 
the American people as trade helps the national economy expand. The 
success of NAFTA has encouraged us to conclude bilateral and 
multilateral free trade agreements around the world.

          A TRADE MODEL FOR U.S. INTERNATIONAL ECONOMIC POLICY

    Since Congress reauthorized the President's trade negotiating 
authority in 2002, the Administration has moved on multiple fronts. We 
have sought to expand free trade to a number of other countries and 
regions by pursuing global negotiations in the WTO, seeking to conclude 
subregional trade agreements such as the Central American FTA (CAFTA), 
as well as the Free Trade Area of the Americas (FTAA), and pursuing an 
aggressive agenda of bilateral free trade agreements including 
Singapore, Chile, Jordan, and Australia. In total, the United States 
has launched bilateral or regional FTA negotiations with 15 countries, 
of which 8 have been concluded, and has announced its intention to 
negotiate with 6 more nations.
    When the United States free trade agreements with Chile and 
Singapore entered into force in January 2004, it dramatically improved 
market access and protections in such areas as services, e-commerce, 
intellectual property, transparency and strengthened anti-corruption 
measures, and enforcement of environmental and labor laws. These high 
standards promote prosperity at home and for our trading partners while 
helping to ensure a level playing field for American workers.
    Based on NAFTA's lessons, our FTA mechanisms seek to create that 
``level playing field,'' especially in agricultural trade. As countries 
have increasingly employed new and more innovative non-tariff barriers 
to trade (such as anti-dumping orders, safeguard measures, sanitary and 
phytosanitary measures (SPS), unreasonable residue testing or labeling 
requirements to protect their markets), all governments have realized 
they must work together to keep trading channels open. NAFTA's SPS 
Committee, for example, provides a forum where all three countries can 
both discuss their respective animal and plant health concerns while 
seeking ways to keep our trade flowing. Based on its good work, the 
``SPS Committee example'' was adopted in the Chile FTA and has been 
recommended for subsequent FTAs as a useful means for finding practical 
solutions to trade problems. This way, each country develops a broader 
understanding of the other country's regulatory system, how regulatory 
requirements affect market access, and how we can build confidence in 
the safety and efficacy of each other's systems.
    Our free trade agreement with Chile took effect on the tenth 
anniversary of NAFTA's enactment, occurring at the same time that we 
finalized negotiations for a U.S.-Central America Free Trade Agreement 
(CAFTA) with El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica, 
and subsequently with the Dominican Republic. Soon the United States 
will launch new FTA negotiations with Panama, Colombia and possibly 
additional Andean nations.
    Our efforts are not restricted to just the Western Hemisphere, 
however. In February 2004, the United States and Australia concluded 
negotiation of a FTA that will eliminate tariffs on more than 99 
percent of U.S. manufactured goods exported to Australia, starting on 
the first day of its enactment. USTR reports that U.S. manufacturers 
estimate that the FTA could allow them to sell $2 billion more per year 
to Australia. In addition, all U.S. farm exports, totaling more than 
$400 million annually, will go duty-free to Australia benefiting many 
sectors such as processed foods, fruits and vegetables, corn oil, and 
soybean oil. Later this spring, negotiations for a bilateral FTA will 
start with Thailand.
    In the Middle East, following the successful completion and 
enactment of the U.S.-Jordan FTA in 2001, we have seen trade between 
our two countries triple in the last three years. We followed this by 
completing negotiation of an FTA with Morocco only two months ago which 
will remove Moroccan trade barriers to our agricultural products, such 
as wheat, corn and soybeans; provide new access for U.S. beef and 
poultry exports; allow openings for service providers in audiovisual, 
telecommunications and engineering companies, as well as new 
opportunities for manufacturers of construction equipment, chemicals 
and information technology.
    Then in January 2004, the U.S. and Bahrain began free trade 
negotiations, marking another country in the region that will benefit 
by a liberalized trade regime. This is an important component to the 
President's Middle East Initiative, the goal of which is to foster 
prosperity by encouraging openness and deepening economic and political 
reforms throughout the region.
    Just as NAFTA has allowed the United States, Canada and Mexico to 
integrate our markets, reduce tariff and non-tariff barriers, and see 
trade expand dramatically, so we expect to see the same results occur 
with our multiple bilateral and multilateral FTAs. We believe that 
pursuing and concluding these FTAs will create significant openings in 
markets that are now blocked by obstacles to U.S. exports. For example, 
in 2003 the combined bilateral FTA markets in countries with whom we 
are now negotiating imported U.S. goods worth approximately $67 
billion. Their developing economies will offer significant 
opportunities for additional growth and expansion in the decades 
ahead--in a tariff-free environment.
    As we work with these and other countries to develop FTAs, the 
``lessons learned'' are likely to help us as we continue our work with 
Canada and Mexico to improve the NAFTA. From harmonizing our tariffs 
and updating our rules of origin for manufactured products to working 
with our neighbors to reduce the risk of diseases such as BSE or Avian 
Influenza (Al), NAFTA is a trade agreement that works and our challenge 
is to ensure that it continues to work, providing necessary fine tuning 
as required.

                 NAFTA SYNERGIES AND ANCILLARY BENEFITS

    While NAFTA's benefits are clearly discernible in some areas, in 
others they are more synergistic and less readily apparent, though in 
fact, perhaps more significant. As I have said, for consumers in all 
three countries, NAFTA's lower tariffs and other provisions have 
provided more choices in foods, goods and services at competitive 
prices, and increased the standard of living.
    The larger issue is not just about trade, however. Free trade 
underpins U.S. goals by encouraging needed economic reforms, promoting 
economic growth and diversification, requiring improved transparency 
and movement towards good governance, and introducing the flexibility 
and competitiveness needed to sustain development. By spurring needed 
reforms and locking them in, the process of concluding and implementing 
a free trade agreement can be more important to long-term growth than 
the commercial benefit of the trade deal itself.
    NAFTA's example was an inspiration for our efforts to promote both 
free trade and commensurate societal and political reforms in 
developing countries. The trade-related societal and political reforms 
dovetail with and mutually reinforce developmental goals being pursued 
within our overall strategy. Since NAFTA, state-of-the-art trade 
agreements, for example, include provisions on transparency, anti-
corruption, labor rights, environmental protections, financial 
services, government procurement, investor protections, dispute 
settlement, intellectual property, and other key issues, in addition to 
the traditional market access provisions. By getting host country 
governments to confront these other, often politically sensitive 
issues, trade agreements reinforce our broader message of the need to 
undertake reforms to promote sustainable development. Conversely, 
reform steps taken as part of development programs also advance the 
cause of free trade.
    While freer trade confers commercial benefits on all participants, 
it is clear that our interest in free trade goes well beyond these 
narrow gains. Considered in its broadest context, free trade is not an 
end in itself, but rather the means to improved quality of life, growth 
and stability.
    NAFTA has provided significant benefits in other, sometimes 
unexpected, ways as well. The movement of goods and people creates 
stronger international linkages amongst our three countries, 
facilitating travel, tourism, and greater understanding through the 
constant exchange of ideas and cultures. As with the ``Great Melting 
Pot'' concept, all NAFTA countries benefit from the increased diversity 
in people, languages, ideas and energy generated by an expanding 
international society.
    One vitally important benefit that has accrued to all three 
countries as a direct result of NAFTA's success has been the strong 
growth in foreign direct investment (FDI) since NAFTA's inception. As 
trade has boomed, FDI and portfolio investment have shot up. While all 
three countries received sizable FDI flows both before and after 1994, 
FDI increased from $63 billion between 1989 to 1994, to $202 billion 
between 1995-2000, more than a 200% increase in dollar volume. For 
Mexico especially, whose economy grew at an average annual rate of over 
5 percent during this same timeframe, this has benefited telecom and 
banking industries, producing a ripple effect in additional growth 
opportunities in major sectors of the economy. It also helped the 
country recover far more rapidly after the Peso Crisis of 1994-1995, 
evidence that both domestic and foreign investors had gained more 
confidence in Mexico's long-term stability.
    The NAFTA partners also recognize the importance of protecting the 
environment for present and future generations. We have seen that free 
trade helps developing countries grow, creating greater wealth and a 
stronger middle class, which then demands both a better environment and 
better working conditions. Some of NAFTA's more tangible benefits stem 
from its environment and labor provisions, many of which are 
incorporated in other FTAs currently being negotiated. The economic 
integration promoted by NAFTA has spurred better environmental 
performance by facilitating the transfer of green technologies and 
market-based solutions to environmental problems and, ultimately, by 
increasing national wealth. Through the North American Agreement on 
Environmental Cooperation (NAAEC), the partners are promoting better 
and more effective enforcement of environmental laws in all three 
countries. Our trilateral Commission for Environmental Cooperation 
(CEC) has programs that encourage the sharing of information, data, and 
best practices while promoting transparency and public participation in 
crafting environmental policies among the three countries.
    The U.S.-Mexico Border Environmental Program stems from NAFTA. 
Cooperation has resulted in greater sophistication in environmental 
management, and greater Mexican public participation in environmental 
policy making. Positive results include creation of a database to track 
polluting chemicals released to air, water, and land, and the phasing 
out of dangerous pesticides such as DDT and chlordane.
    A major social dimension was added to NAFTA via the North American 
Agreement on Labor Cooperation (NAALC, i.e., NAFTA's supplemental labor 
agreement), which seeks to improve working conditions and living 
standards by committing the three countries to accept eleven labor 
principles to protect, enhance and enforce basic workers' rights. To 
accomplish these goals, the NAALC creates mechanisms for cooperative 
activities and intergovernmental consultations, as well as for 
independent evaluations and dispute settlement processes to help 
enforce national labor laws. With the participation of labor union 
representatives, employers and government officials, an important 
balance has been built into NAFTA's policy discussions and programs.
    NAFTA also has a formal process through which the public may raise 
concerns about labor law enforcement directly with their governments. 
This process has led to the filing and review of 28 submissions under 
the NAALC on issues such as freedom of association; the right to 
organize and bargain collectively, the right to strike; child labor; 
minimum employment standards; employment discrimination; occupational 
safety and health; and the protection of migrant workers.
    As the United States has pursued additional FTAs, these new 
agreements have applied ``lessons learned'' from NAFTA. Recognizing the 
importance of capacity building, our newer FTAs give increased priority 
to helping developing countries support their existing environmental 
and labor laws and craft enforceable dispute settlement procedures. 
Since non-enforcement is often due to a lack of resources, the United 
States is using its own aid programs and working with NGOs, the IMF, 
World Bank and others to ensure inadequate funding does not undermine 
the effectiveness of environmental and labor standards.
    To be candid, these measures alone cannot prevent all forms of 
environmental degradation or solve all labor-related problems, but they 
go a long way toward developing greater public awareness and 
participation, higher standards for openness and transparency, lowered 
thresholds for joint action and, in some new FTAs, establishing new 
benchmarks to measure progress.
    This exemplifies how, in the pursuit of ensuring a responsible, 
competitive and productive work environment, FTAs help lock-in 
political reforms and civil society developments. In Mexico, the 
changes have been dramatic--a more open, pluralistic society has been 
created with a demonstrably more accountable, democratic government, 
making Mexico both an economic and political success story. No longer a 
one-party political system, Mexico's growth has led to the 
establishment of more NGOs, a more independent press, a larger role in 
international institutions, and increased cooperation with the United 
States on issues ranging from the environment and drugs to law 
enforcement and immigration. Each of these reforms ultimately promotes 
stability and growth and thereby strengthens our national security.

             POST SEPTEMBER 11 AND SECURE BUT OPEN BORDERS

    NAFTA has had a major impact in the formulation of our post-
September 11 ``Secure But Open Borders'' policies. As a result of 
September 11 and its aftermath, no higher priority exists than ensuring 
that our national security is strengthened so that such a catastrophe 
can never happen again. While our national heritage promotes open 
contacts with the international world, new realities dictate that we 
must do so with greater caution and a discerning eye, and this has 
naturally affected our relations with our two most important neighbors.
    The good news is that both Mexico and Canada understand this, and 
stand foursquare with us in recognizing that we must jointly defend our 
homelands from terrorism and security threats. The extensive 
interagency ties between our governments, developed in large measure as 
a result of NAFTA, were instrumental in allowing us to quickly craft 
the ``Smart Borders'' accord with Canada and a ``Border Partnership 
Action Plan'' with Mexico, both of which have done a remarkable job in 
securing our borders and keeping them open while mitigating disruptions 
in the flow of both goods and people. This is a significant achievement 
that demonstrates the advantages of a better, more secure North 
American trading environment even as we further our economic 
integration and national relationships. This coordinated collaboration 
with both Canada and Mexico enables us to facilitate legitimate trade 
and travel while simultaneously improving interdiction and 
investigation of illicit movements of drugs, people, weapons, cash or 
materials that could potentially be utilized by terrorists to attack 
our country.
    The ties I just referred to go beyond our joint work to improve 
national security. Whether it be in international institutions such as 
the United Nations, the World Trade Organization (WTO), or other 
organizations, the United States has often found itself working side by 
side with Canada and Mexico to support common policies and interests. 
It's worth remembering that in the trade arena, Mexico did not even 
join the General Agreement on Tariffs and Trade (GATT)--the WTO's 
predecessor--until 1986. In less than 20 years it has gone from being 
outside the world's multilateral trade regime to hosting the WTO 
Ministerial last September in Cancun, Mexico. In Cancun, Mexican 
Foreign Secretary Derbez worked extremely hard to bring developed and 
developing countries together in support of a text charting the way 
forward in our Doha negotiations. In the FTAA, the U.S., Mexico, and 
Canada, along with several other free trade partners in the Western 
Hemisphere, have worked very closely to ensure the FTAA can indeed 
bring the trade and investment benefits to the Hemisphere that our 
people need. In Monterrey, Mexico in March 2002, Mexico hosted the UN 
Conference on Financing for Development and worked with us to help 
shape a productive outcome. While we may have differences on specific 
points or strategies, there is no question that the U.S., Mexico, and 
Canada have become ``like-minded'' in our ultimate objectives.

                    NAFTA CANNOT SOLVE ALL PROBLEMS

    NAFTA is not without its problems, of course. Some critics have 
claimed that hand in hand with globalization, NAFTA would contribute to 
U.S. industrial decline and a transfer of jobs out of the country. A 
review of the data shows that this has not been the case. A number of 
different studies of NAFTA agree that economic growth in the United 
States has increased, as it has in Mexico and Canada. Studies reach a 
variety of different conclusions about whether NAFTA has caused a net 
loss or net gain in jobs, but most conclude that, at worst, NAFTA has 
probably been neutral in increasing or decreasing job growth rates. 
While some U.S. companies have opted to employ lower-wage workers in 
Mexico and other countries to remain competitive internationally, other 
companies have significantly expanded their activities domestically and 
now produce sophisticated export products. This leads to hiring more 
highly skilled and highly educated workers at higher wages.
    Gary Hufbauer at the Institute for International Economics asserts 
that, after NAFTA was enacted, U.S. employment grew by over 20 million 
between 1993 and 2000, with U.S. manufacturing output soaring in the 
1990s by 44% in real terms. To the extent that NAFTA succeeds in 
stimulating trade and cross-border investment, jobs in each country 
were created in some industries and lost in others, which has been 
necessarily wrenching for a number of American companies, communities 
and families. As this transition has progressed, however, positive 
economic growth has been generated, efficiencies have been improved and 
costs have been lowered for both consumers and industries, helping to 
raise average incomes.
    The guiding wisdom behind NAFTA was to eliminate economic barriers, 
particularly tariffs and quotas, at our two borders to generate 
increased trade among the United States, Canada and Mexico. Though the 
majority of economic barriers between our three countries have largely 
been removed, there remain a number of NAFTA trade issues still to be 
resolved, particularly concerning agricultural products. This is an on-
going process. The Administration is determined to utilize all the 
resources at its disposal to effectively remove those lingering 
obstacles to free trade, such as Mexico's 20 percent tax on products 
using high fructose corn syrup, or those non-tariff barriers which 
prevent the proper and expeditious exports of U.S. agricultural goods. 
Under NAFTA's trade dispute resolution process, all three countries 
have access to an independent, transparent process that utilizes expert 
panels to objectively assess the merits of each country's arguments, 
and to adjudicate fairly. This emphasis on rule of law continues to be 
incorporated in all our FTAs around the world.

                          THE FUTURE OF NAFTA
 
   NAFTA does not exist in a vacuum. On the contrary, our integrated 
North American market is going to see ever increasing competition from 
outside producers. As the United States continues its efforts to open 
new markets for our products, and to remove barriers to trade which 
retard economic growth in developing countries, we can expect that the 
combined, trilateral North American economy will have to evolve to take 
advantage of each NAFTA country's advantages and efficiencies. In 
Mexico, the Government recognizes that enhancing competitiveness 
requires policy reform, such as fiscal reform, but also necessitates 
additional measures to reduce the cost of business by streamlining 
judicial and regulatory requirements for companies. Increasing global 
competitiveness is likely to spur additional innovation and growth in 
ways we cannot imagine but which we can anticipate. By that I mean--the 
need to plan ahead, in order to improve and more closely integrate our 
national infrastructures, and provide better means of production as 
well as shipment of goods. Increased globalization and competition from 
other countries and regions, especially China, Japan, Asia and 
elsewhere, could encourage greater linkages amongst the three NAFTA 
countries, ensuring our own products remain competitive in the global 
marketplace.
    Energy production and trade provide a good example. It is clear 
that all three NAFTA countries have vast energy demands in electricity, 
natural gas and oil that will increase. One of our objectives should be 
to ensure that energy production, shipment and utilization is being 
done by the most efficient means possible, at the least cost, so that 
each country may profit and benefit by the trade generated. The 
electrical grid problems experienced by the United States and Canada in 
the summer of 2003 highlighted the need for closer cooperation, 
planning and integration to prevent future problems in our electrical 
energy generation and transmission. Under NAFTA, we have an established 
North American Energy Working Group (NAEWG) that is now working 
together to prevent such future problems. While natural competition can 
reduce energy costs to their lowest levels, the synergies created by 
the new technologies both demanded and created could also spur greater 
development and growth in trade.
    By promoting greater integration and improvements in road, rail, 
and aviation transportation--where we seek full North American Open 
Skies--NAFTA will continue to spur solid growth and development. We 
need to look closely at infrastructure constraints as trade continues 
to increase. Coupled with the increased spread of telecommunications 
equipment and new information technology, the North American market can 
anticipate continued strong market and trade growth that will benefit 
each of our countries. These are just some examples of how increased 
integration linkages amongst the three NAFTA economies can promote 
efficiencies that will encourage continued, long-term growth rates and 
help deepen and broaden the North American market. Under the 
President's leadership, we are actively engaged with Canada and Mexico 
in reviewing areas where synergy exists, so that we may enhance our 
common economic prosperity and national security.

                               CONCLUSION

    I appreciate, Mr. Chairman, having this opportunity to speak on the 
valuable benefits the North American Free Trade Agreement has brought 
to the United States over the past ten years. While change can be 
disruptive, whether in economic, political or developmental terms, 
NAFTA has been a resounding success for all three partner countries. It 
has generated clear growth in trade, reduced costs across the board for 
consumers and businesses, improved the quality of life for our citizens 
by providing consumers more and better choices at competitive prices, 
and helped foster the democratic and civil society reforms that have 
transformed Mexico while serving as a beacon of hope for other 
developing countries with whom we are negotiating FTAs around the 
world. The changes wrought by NAFTA in our societies have been 
profound, and they are still being felt and observed by other 
countries.
    NAFTA's success has been inspirational as we seek to open other 
markets to both U.S. goods, and influence. In doing so, NAFTA's legacy 
of helping other societies to develop themselves equally embraces 
reforms for improved governance. All societies benefit when free trade 
and open markets allow competition in selling goods and services. They 
also benefit when the same reforms create a better, more stable and 
growing civil society. In support of the President's policies to 
liberalize trade bilaterally, regionally and globally, the State 
Department will continue to work with other agencies to remove all 
tariff and non-tariff barriers to our exports while advocating strongly 
for a level playing field on behalf of all American businesses.
    Thank you.

    Senator Hagel. Secretary Wayne, thank you.
    Administrator Terpstra.

  STATEMENT OF HON. A. ELLEN TERPSTRA, ADMINISTRATOR, FOREIGN 
      AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE

    Ms. Terpstra. Thank you very much, Mr. Chairman, Senator 
Coleman. I appreciate the opportunity to be here with you today 
to talk about agricultural trade under NAFTA.
    Let me begin my remarks with an unambiguous statement. The 
agricultural sector of our economy under NAFTA is an 
unqualified success. The United States, Mexico, and Canada are 
enjoying a thriving agricultural trade relationship derived 
from their historic decision to open our borders and break down 
barriers to trade. In NAFTA's 10th year, markets continue to 
open for freer trade of agricultural products. Producers in all 
three NAFTA countries benefit from the reduction of arbitrary 
and discriminatory trade rules, while consumers enjoy lower 
prices and more choices.
    Our farmers and ranchers have been major beneficiaries of 
NAFTA's success, as exports of food and agricultural products 
from the United States to our NAFTA partners reached a record 
$17.2 billion in 2003. These exports support approximately 
258,000 U.S. jobs.
    When you compare the performance of our agricultural 
exports to our NAFTA partners with our export performance to 
the rest of the world, the difference is startling. In the 10-
years since NAFTA was implemented, global U.S. agricultural 
exports increased by an average of $250 million a year as a 
strong dollar, numerous currency crises, and a global economic 
slowdown combined to slow the overall growth of U.S. exports. 
However, during this same 10-year period, our exports to NAFTA 
grew by more than $800 million a year.
    A wide variety of U.S. products have benefited from that 
access, including processed grains, grocery products, corn, 
essential oils, poultry meat, soybeans, feed ingredients, beef 
and beef offal, cotton, wheat, sorghum, and pork.
    Even in the area of horticultural products, where 
competition is intense, U.S. producers have benefited from 
NAFTA. In 1993, our horticultural exports to Canada and Mexico 
totaled $2.8 billion. In 2003, these had increased to $5 
billion a year. Fresh and processed fruits and vegetables, tree 
nuts, and wines have all benefited from NAFTA's 
accomplishments, such as lower tariffs, the elimination of 
import licenses, and a more transparent business environment.
    Trade is a two-way street, and it's true that agricultural 
imports from Canada and Mexico have also increased since NAFTA 
was implemented. Imports from Canada increased by an average of 
$590 million a year, while increases from Mexico have averaged 
$300 million a year. However that growth had more to do with 
the strength of the U.S. economy and the dollar than it did 
with the trade provisions of NAFTA, since our markets were 
already very open when the agreement went into effect.
    Let me talk specifically now about each country for just a 
moment.
    Canada is a very good example of a mature market where U.S. 
exports have demonstrated impressive growth in large part due 
to NAFTA. Today, Canada is our largest agricultural export 
market. Under NAFTA, our exports to Canada have increased by 75 
percent, reaching $9.3 billion last year. For Americans, this 
has meant over 140,000 jobs.
    Specific products that are setting export records to Canada 
include vegetables, meats, soybean meal, bulk commodities, 
snack foods, vegetable oils, fresh fruits, and pet food. Some 
71 percent of our agriculture exports to Canada are in the 
consumer-oriented, high-value category. Of course, this also 
means increased jobs in the United States as our food-
processing industry adds capacity for this growing market. Last 
year, fresh fruits and vegetables led U.S. agricultural exports 
to Canada, stemming from increased demand in the food-service 
sector there.
    Now let's look at Mexico for just a moment. Mexico today is 
the world's seventh-largest consumer of food by value. With 
recent expenditures estimated at $93 billion, that's double the 
level of 1995. This exceptional growth in overall food demand 
helps explain why Mexico has been one of the fastest-growing 
agricultural import markets since 1995. Our exports to Mexico 
have doubled under NAFTA, reaching $7.9 billion in 2003. And 
today Mexico is our third-largest export destination.
    In 2003, we sent Mexico record amounts of processed fruits 
and vegetables, red meats, wheat, rice, and soybeans. Our 
exports to Mexico are more diversified than those to Canada--38 
percent are bulk commodities, 40 percent consumer-oriented 
products, and 22 percent intermediate semi-processed products. 
Mexico is one of our largest export markets for each of these 
categories.
    While implementation of NAFTA has not always proceeded 
smoothly in the agricultural area and disputes continue to 
affect trade in some areas, there is no doubt that NAFTA has 
had a significant positive impact on all three partners.
    Equally as important, we've established procedures under 
NAFTA for handling these disputes. For both Canada and Mexico, 
we are actively working on trade disputes, whether they are 
related to SPS measures or to trade remedies. The United States 
and our NAFTA partners have signed bilateral memorandum of 
understandings to create consultative committees on 
agriculture, known as CCAs, to address the full range of 
current and future trade-related concerns. These CCAs are often 
complemented by high-level bilateral, and sometimes trilateral, 
discussions on important matters. Recent areas where we've had 
successful cooperation include the significant restoration of 
trade in beef with both Canada and Mexico.
    Trade liberalization is critical to the economic future of 
America's agriculture. Access to growing markets is essential 
to the profitability of the U.S. farm sector, and NAFTA is an 
excellent example of how trade liberalization benefits our 
farmers, ranchers, and consumers. The administration is 
committed to American agriculture's success in world markets. 
NAFTA is contributing to that success. It is on track.
    We will continue working closely with the Congress in 
addressing the trade-policy issues that remain unresolved and 
others as they emerge. We look forward to close collaboration 
and a strong partnership in building on the successes already 
achieved through NAFTA and our other market-opening agreements, 
and expanding global trade opportunities for America's farmers 
and ranchers.
    Thank you very much.
    [The prepared statement of Ms. Terpstra follows:]

              Prepared Statement of Hon. A. Ellen Terpstra

    Mr. Chairman, Members of the Subcommittee, I am pleased to appear 
before you today to discuss agricultural trade under the North American 
Free Trade Agreement (NAFTA). This year as we celebrate that 
agreement's tenth anniversary, I welcome the opportunity to review the 
results of NAFTA and to discuss some important trade issues that 
currently occupy our attention.
    Let me begin my remarks with an unambiguous statement--in the 
agricultural sector of our economy, NAFTA is an unqualified success. 
The United States, Mexico, and Canada enjoy a thriving agricultural 
trade relationship derived from the historic decision to open our 
borders and break down barriers to trade. In NAFTA's tenth year, 
markets continue to open and support a freer flow of agricultural 
products. Farmers in the three NAFTA countries benefit from the 
reduction of arbitrary and discriminatory trade rules, while consumers 
enjoy lower prices and more choices.

                           BENEFITS OF NAFTA

    U.S. farmers and ranchers have been major beneficiaries of NAFTA's 
success as exports of food and agricultural products from the United 
States to our NAFTA partners reached a record $17.2 billion in 2003. 
These exports support approximately 258,000 U.S. jobs (every $1 billion 
in exports creates 15,000 jobs). NAFTA markets continue to be a bright 
spot for U.S. agriculture, as agricultural trade with our NAFTA 
partners has increased in size and importance.
    When you compare the performance of U.S. agricultural exports to 
our NAFTA partners with our export performance to the rest of the 
world, the difference is even more startling. In the ten years since 
NAFTA was implemented, global U.S. agricultural exports increased by an 
average of only $250 million a year as a strong dollar, numerous 
currency crises, and a global economic slowdown combined to slow the 
overall growth in U.S. exports. However, during this same 10-year 
period, our exports to NAFTA grew by more than $800 million a year. 
Exports to Mexico grew by an average of $420 million a year while 
exports to Canada increased by $400 million a year, making them our two 
fastest growing markets by a wide margin.
    What makes our export performance to Canada and Mexico even more 
exceptional is that it occurred during a period when the value of the 
U.S. dollar was particularly strong against most other currencies, 
including Canada's and Mexico's. A strong dollar hurt our exports in 
most of the world's major markets. However, in Canada and Mexico, the 
export losses associated with a strong dollar were more than offset by 
the export gains generated from significant improvements in market 
access provided under NAFTA.
    A wide variety of U.S. products benefited from that access 
including processed grains, grocery products, corn, essential oils, 
poultry meat, soybeans, feed ingredients, beef and beef offal, cotton, 
wheat, sorghum, and pork.
    Even in the area of horticultural products, where competition is 
intense, U.S. producers have benefited from NAFTA. In 1993, U.S. 
horticultural exports to Canada and Mexico totaled $2.8 billion. By 
1997, after 4 years of NAFTA, our sales had jumped by more than 20 
percent to $3.5 billion. In 2003, horticultural exports to Canada and 
Mexico continued their strong performance, reaching $5 billion, up 
approximately 8.5 percent from 2002. Fresh and processed fruits and 
vegetables, tree nuts and wines have all benefited from NAFTA's 
accomplishments, such as lower tariffs, the elimination of import 
licenses and a more transparent business environment.
    Trade is a two-way street and U.S. agricultural imports from Canada 
and Mexico also increased since NAFTA was implemented. Imports from 
Canada increased by an average of $590 million a year while increases 
from Mexico averaged $300 million a year. However, that growth had more 
to do with the strength of the U.S. economy and the dollar than it did 
with the trade provisions of NAFTA since our market was already 
significantly open when the agreement went into effect. In fact, over 
the past 10 years, our imports from the rest of the world expanded as 
well--by an average of almost $900 million a year--with almost all 
major foreign suppliers significantly increasing their sales to the 
United States.
    In addition to lowering trade barriers, NAFTA has led to a growth 
in cross border investment and economic integration on the North 
American continent. NAFTA fosters an environment of confidence and 
stability required to make long-term investments and partnering 
commitments. With a strong, certain, and transparent framework for 
investment, North America has attracted foreign direct investment in 
the food processing industry in all three NAFTA countries.
    U.S. direct investment in Mexico has been concentrated in highly 
processed products such as pasta, confectionery items, and canned and 
frozen meats. In Canada, U.S. direct investment has been geared toward 
the handling and processing of grains. Mexican companies have invested 
in U.S. firms engaged in bread baking, tortilla making, corn milling, 
and the manufacture of Mexican-style food products while Canadian 
direct investment has been geared to more general food processing.
    The increased trade and investment that has resulted from NAFTA has 
spurred the economic integration of the continent. NAFTA has led to a 
more unified system of commercial law, the establishment of common 
antitrust and regulatory procedures, harmonization of product 
standards, and increased coordination of domestic farm, market, and 
macroeconomic policies which has deepened market integration and 
enhanced market efficiency and growth within North America. In short, 
larger and freer agricultural markets in North America have meant more 
choices for consumers.

                                 CANADA

    Canada is a good example of a mature market where U.S. exports have 
demonstrated impressive growth in large part due to NAFTA. Canada is 
our largest agricultural market. Under NAFTA, U.S. exports to Canada 
have increased by 75 percent reaching $9.3 billion in 2003. For 
Americans, this has meant almost 140,000 jobs.
    Products setting export records include vegetables, meats, soybean 
meal, bulk commodities, snack foods, vegetable oils, fresh fruits, and 
pet foods.
    Over 70 percent of our agricultural exports to Canada are in the 
consumer-oriented high-value category. Of course this means increased 
jobs in the United States as our food processing industry adds capacity 
for this growing market. In 2003, fresh fruits and vegetables led U.S. 
agricultural exports to Canada, stemming from increased demand in the 
food service sector. U.S. fresh vegetable sales to Canada have posted 
an annual growth rate of 4.2 percent since NAFTA implementation.
    Today, Canada is the second largest export market for U.S. poultry 
with a 77-percent gain over the pre-NAFTA level. U.S. exports of dairy 
products to Canada have more than tripled. U.S. corn is used in Canada 
to feed livestock, to process ethanol, and to produce sweeteners. And 
U.S. pet food sales to Canada have surged by 40 percent under NAFTA.
    NAFTA has benefited Canada as well. According to Canada's 
Department of Foreign Affairs and International Trade, NAFTA has 
brought economic growth and rising living standards to its citizens. In 
2003, Canada's agricultural exports to the United States reached a 
record $10.3 billion. Leading agricultural exports from Canada include 
snack foods, red meats, live animals, and fresh and processed 
vegetables.
    It is important to note that these Canadian imports also create 
jobs in the United States in the trade and transportation, services, 
food processing and other manufacturing sectors while at the same time 
giving U.S. consumers more variety in their buying options.

                                 MEXICO

    Mexico is the world's seventh largest consumer of food by value 
with recent expenditures estimated at $93 billion--double the level of 
1995. This exceptional growth in overall food demand helps explain why 
Mexico has been one of the world's fastest growing agricultural import 
markets since 1995. The good news for U.S. agriculture is that our 
exporters supply 75 cents of every dollar of this import growth. U.S. 
agricultural exports to Mexico have doubled under NAFTA reaching $7.9 
billion in 2003 supporting approximately 118,500 U.S. jobs and making 
Mexico our third largest agricultural export market and poised to 
overtake our number two market, Japan.
    In 2003, the United States sent Mexico record amounts of processed 
fruits and vegetables, red meats, wheat, rice and soybeans.
    U.S. exports to Mexico are more diversified than those to Canada 
with 38 percent being bulk commodities; 40 percent, consumer-oriented 
products; and 22 percent, intermediate semi-processed products. Mexico 
is one of our largest export markets for each category.
    Corn, soybean, and wheat producers have increased sales in Mexico. 
Growth in cotton sales to Mexico has also been very impressive, due to 
the country's rising consumer and export demand for its textiles and 
apparel. However, the biggest surprise has been the strong growth of 
many of our consumer-oriented products to Mexico.
    Before NAFTA, U.S. exports of these products were severely limited 
by trade barriers and weak demand. Today, with lower market access 
barriers and the more vibrant Mexican economy that have resulted from 
NAFTA, Mexico ranks as one of our top export markets for a wide range 
of high-value foods, including meats, fresh and processed horticultural 
products, pet foods, and grocery products.
    As with Canada, our agricultural trade with Mexico continues to 
have a direct impact on the prosperity of our agricultural industry. 
For example, in Nebraska, the ``Cornhusker State,'' and other large 
feed producing states, feed corn producers have benefited greatly under 
NAFTA provisions. The volume of U.S. corn exports to Mexico has risen 
over 42 percent since 1994, reaching 5.5 million metric tons, valued at 
$653 million, in 2003.
    Maryland is another example of a state whose producers have 
benefited from NAFTA. One-fourth of Maryland's farm receipts come from 
broiler production. The amount of U.S. poultry going to Mexico and 
Canada under NAFTA has almost doubled.
    Mexico's agricultural exports have also benefited from NAFTA. While 
Mexico has run a consistent annual deficit of around $1.5 billion with 
the United States, its agricultural exports into the U.S. market have 
nearly doubled since NAFTA's inception, reaching a record $6.3 billion 
in 2003. As with Canada, this trade creates U.S. jobs in the food 
support, distribution and processing industries and offers consumers 
more purchasing choices.

                              TRADE ISSUES

    While implementation has not always proceeded smoothly, and 
disputes continue to affect trade in some commodities, there is no 
doubt that NAFTA has had a significant positive impact on the NAFTA 
partners. Equally as important, the agreement established procedures 
for handling disputes. By ``locking in'' key trade and investment 
reforms, the agricultural sectors and governments of NAFTA partners 
have been able to devote greater attention to resolving conflicts 
related to other issues such as sanitary and phytosanitary (SPS) 
measures. In order to facilitate the resolution of such issues the 
United States remains committed to using the tools available under both 
NAFTA and the WTO, but also has developed bilateral mechanisms.
    In any trading relationship of such magnitude, problems are bound 
to occur. For example, since 1999, Mexico has increased its use of SPS 
import regulations, which has led to disruptions in some of our 
agricultural exports. It has also used anti-dumping cases to increase 
duties and slow or block trade. Furthermore, a lack of consistency in 
applying import requirements has caused problems at points of entry. 
Issues still unresolved include a range of phytosanitary disputes, BSE 
and North American harmonization, and avian influenza.
    Likewise, trade disputes have arisen between the United States and 
Canada over such issues as wheat, softwood lumber, and dairy export 
subsidies. With market access issues largely addressed through NAFTA, 
the need to take matters to the WTO has been limited to just a few key 
problems.
    For both Mexico and Canada, we are actively working on the trade 
disputes whether they are related to SPS measures or trade remedies. 
The United States and our NAFTA partners have signed bilateral 
Memorandum of Understandings (MOUs) to create Consultative Committees 
on Agriculture (CCAs) to address the full range of current and future 
trade-related concerns. These CCAs are often complemented by high-level 
bilateral and sometimes trilateral discussions on important matters. 
Recent successful cooperation efforts include the significant 
restoration of the trade in beef with both Canada and Mexico.

                             LOOKING AHEAD

    When talking about NAFTA and agriculture, it is important to note 
that the agreement has more significance than any of the statistics I 
have given you today. NAFTA serves as a model and as a foundation for 
all our efforts to achieve trade liberalization. In this hemisphere we 
are using NAFTA as a building block to move toward the free flow of 
agricultural products between more and more countries. The recently 
concluded negotiations between the United States and Costa Rica, the 
Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua 
will strip away barriers to trade, eliminate tariffs, open markets, and 
promote investment, economic growth, and opportunity for seven 
countries.
    Also within our hemisphere, the United States is negotiating free 
trade agreements with Panama and the Andean countries of Peru, 
Colombia, Ecuador, and Bolivia. Further, the Free Trade Area of the 
Americas (FTAA) talks, launched in 1998, offer an important opportunity 
to create the economic growth necessary to alleviate poverty and raise 
living standards throughout the Americas. The FTAA will be the largest 
trade zone in the world, with a combined gross domestic product of over 
$13 trillion.
    To thrive and prosper in the 21st century, U.S. agriculture must 
continue to look beyond the relatively mature domestic market to the 
expanding global marketplace.
    The United States is now the world's largest agricultural exporter 
by value, with U.S. agricultural exports equaling 28 percent of farm 
cash receipts. One out of three acres are planted for export.
    American farmers export 49 percent of their wheat, 37 percent of 
their soybeans, 65 percent of their almonds and 47 percent of their 
rice. High-value products generate even more additional economic 
activity--$370 million for every $1 billion exported.
    Trade liberalization is critical to the economic future of our 
agricultural industry. Access to growing markets is essential to the 
profitability of the U.S. farm sector.
    In the next 20 years, the world will gain another 1.4 billion 
people--a 25 percent increase in global population. The demand for 
agricultural goods will soar. The U.S. is well-equipped to meet this 
demand--our productivity increases far exceed our population growth.
    USDA economists project U.S. agricultural exports in fiscal 2004 
will reach $59 billion. These exports will create an additional $84 
billion in support services to harvest, process, package, store, 
transport, and market products. Farm exports support 885,000 jobs and 
about one-third of these are in rural communities. Many jobs are on the 
farm, but most are in trade and transportation, services, food 
processing, and other manufacturing sectors.
    Mr. Chairman, the Administration is committed to American 
agriculture's success in world markets. NAFTA is contributing to this 
success. It is on track. We will continue working closely with the 
Congress in addressing the trade policy issues that remain unresolved 
and any that emerge. We look forward to close collaboration and a 
strong partnership in building on the successes already achieved 
through NAFTA and other market-opening agreements in expanding global 
trade opportunities and ensuring a level playing field for U.S. 
agriculture.

    Senator Hagel. Administrator Terpstra, thank you.
    Administrator Rosales, please.

 STATEMENT OF HON. MANUEL ROSALES, ASSISTANT ADMINISTRATOR FOR 
    INTERNATIONAL TRADE, U.S. SMALL BUSINESS ADMINISTRATION

    Mr. Rosales. Thank you.
    Thank you, Senator Hagel and Senator Coleman, for inviting 
me to testify on the impact of NAFTA on trade and the U.S. 
Small Business Administration's role in the President's 
international trade agenda and export strategy.
    I would like to first recognize the leadership of SBA's 
Administrator, Hector Barreto, a staunch advocate of active 
small-business participation in trade in the international 
marketplace.
    The SBA has been working closely with the Department of 
State, Department of Commerce, the Export-Import Bank, Overseas 
Private Investment Corporation, the Trade Development Agency, 
and other Trade-Promotion Coordinating Committee Agencies in 
developing recommendations for the National Export Strategy. 
The cooperative agreements that we have instituted with our 
partner agencies will help ensure that American small 
businesses can be competitive in the global marketplace.
    NAFTA has increased small-business participation in 
exporting significantly, and this growth has been larger for 
NAFTA than the rest of the world. According to the U.S. 
Department of Commerce, one third of all small-business exports 
go to Canada and Mexico, which is an increase from 24 percent 
in 1992 to 33 percent in 2001. All exporters to Canada and 
Mexico have benefited from NAFTA, but small businesses have 
particularly seen an increase in exporting opportunities.
    Compared with larger firms, small firms are especially 
responsive to U.S. Government initiatives to open foreign 
markets. Nearly 90 percent of all small exporters do business 
from one single U.S. location, unlike large firms, who may have 
offshore business affiliates, which could be used to avoid 
trade barriers and gain market access.
    Canada has proven to be the most popular export destination 
for small businesses. In 2001, 94 percent of all U.S. exports 
to Canada were from small firms, with a value of $36.8 billion. 
Likewise, in 2001, 91 percent of U.S. exports to Mexico were 
from small businesses, with a value of $23.4 billion. This 
combined total of small-business exports to Mexico and Canada 
accounted for 33 percent of total U.S. merchandise exports for 
small business in 2001.
    These increases in small-business exporting are important 
because small business creates two thirds of the new U.S. jobs, 
are responsible for much of the economy's innovation, and 
generate over half our private gross domestic product. While 
approximately two thirds of U.S. exporters have fewer than 20 
employees, less than 1 percent of our small businesses are 
exporting their products.
    A survey done by the U.S. Department of Commerce of more 
than 2,000 non-exporting firms last year indicated that 30 
percent of non-exporting small businesses would be interested 
in exporting if someone pointed the way. In order to meet the 
needs of small- and medium-sized firms and create a one-stop-
shop approach, over the past years we have enhanced our working 
relationship with our partners in such a way that we will guide 
and assist small businesses to have an even greater opportunity 
to trade abroad.
    Over the past year, SBA and Ex-Im Bank are very 
aggressively implementing the Small Business Initiative, a 
memorandum of understanding. To leverage market and resources, 
and to raise awareness among lenders and exporters, we have 
done a number of things. First, we have held joint symposia 
throughout the United States focusing on small business, and 
showing a streamlined approach to exporters. We have also been 
working on a joint marketing initiative, which will be soon 
implementing the harmonization of SBA's and Ex-Im Bank's export 
working capital loan programs. Coordinating with our other 
Federal agencies is one of the best ways to achieve an increase 
in small-business trade participation.
    Another example of interagency coordination is our work 
with the Overseas Private Investment Corporation. SBA 
participated in a trade-investment forum in Arizona that 
reached out to our small-business exporters and introduced them 
to SBA and OPIC products and services that were available. We 
see this as just the beginning of a very important partnership, 
and only see it getting stronger.
    The ability to work very closely with the Department of 
Commerce reaching out to the small-business community has been 
very rewarding and has shown results. I have had the 
opportunity to participate with both Secretary Evans and Under 
Secretary Aldonas in several trade missions which focused on 
opening new market opportunities for small businesses.
    One success story is Don Metz, owner of Metz Tool & Die, in 
Chicago, who received a significant order for his products as a 
result of a trade mission that SBA coordinated in Mexico. SBA 
helped the business owner participate in that mission, arranged 
business-to-business meeting for him with respect to Mexican 
SME trading partners, and subsequently provided export working 
capital loans as he successfully concluded contracts and 
delivery to Mexican buyers.
    The SBA also supports the U.S.-Mexico Partnership for 
Prosperity initiative and its related Good Partners Program. 
According to our SBA field representatives, during 2003 SBA 
counseled and trained more than 13,000 small-business owners in 
opportunities in exporting, and these small-business owners 
then generated over $110 million in export sales. We also 
provided small businesses with the necessary capital through 
our loan-guarantee programs, to consummate their international 
transactions. Last year, SBA guaranteed 1658 loans to 
exporters, who generated another $1 billion in sales. That 
total, of $1.1 billion in sales, was supported by SBA through 
its technical and financial assistant programs. Already to this 
date, we are near 66 percent, as of Friday, of our goal, and we 
expect to surpass last year's successes.
    Reaching out domestically to the export community has also 
been a high priority between the SBA and the Department of 
Commerce. For instance, we successfully participated in major 
domestic trade shows, trade finance seminars, direct-mail 
campaigns, and joint-marketing and joint-training programs. 
NAFTA has proven to be extremely successful in expanding 
opportunities for small businesses, yet more work needs to be 
done.
    SBA looks forward to continuing its work with its TPCC 
partner agencies to ensure the coordination the trade promotion 
and finance programs meet the needs of our small-business 
exporters. We are also fully committed to supporting the 
President's overall international trade agenda as it continues 
to provide opportunities for small-business exporters.
    There has never been a better time to make sure U.S. small 
business continues to be the most competitive companies in the 
world. In 37 states, at least 80 percent of all exporters are 
small to medium businesses. In every state the majority of 
exporters are SMEs; and in 32 states, SMEs export over $1 
billion. These statistics demonstrate the important role of 
small business in the international marketplace, and the SBA is 
determined to facilitate this valuable contribution.
    I look forward to the SBA's ongoing contribution to the 
administration's trade policy, and our commitment to evaluate 
and better coordinate our programs. I would be more than happy 
to answer any questions you may have.
    Thank you.
    [The prepared statement of Mr. Rosales follows:]

               Prepared Statement of Hon. Manuel Rosales

    Mr. Chairman, Ranking Member and distinguished Members, thank you 
for inviting me to testify on the impact of NAFTA on trade and the U.S. 
Small Business Administration's (SBA) role in the President's 
International Trade agenda and export strategy.
    I would first like to recognize the leadership of SBA's 
Administrator Hector Barreto, a staunch advocate of active small 
business participation in trade and the international market place. The 
SBA has been working closely with the Department of State, Department 
of Commerce, the Export-Import Bank of the United States (Ex-Im Bank), 
the Overseas Private Investment Corporation (OPIC), and other Trade 
Promotion Coordinating Committee agencies in developing recommendations 
for the National Export Strategy. The Cooperative Agreements that we 
have instituted with our partner agencies will help ensure that 
American small businesses can be competitive in a global marketplace.
    The North American Free Trade Agreement (NAFTA) has increased small 
business participation in exporting significantly, and this growth has 
been larger for NAFTA than the rest of the world. One-third of all 
small business exports go to Canada and Mexico, which is an increase 
from 24 percent in 1992 to 33 percent in 2001. All exporters to Canada 
and Mexico have benefited from NAFTA, but small businesses have 
particularly seen an increase in exporting opportunities. Compared with 
large firms, small firms are especially responsive to U.S. Government 
initiatives to open foreign markets. Nearly 90 percent of all small 
exporters do business from a single U.S. location, unlike large firms 
that may have offshore business affiliates which can be used to avoid 
trade barriers and gain market access.
    Canada has proven to be the most popular export destination for 
small businesses. In 2001, 94% of the U.S. exporters to Canada were 
small firms, with a value of $36.8 billion. Similarly in 2001, 91% of 
the U.S. exporters to Mexico were small businesses, with a value of 
$23.4 billion. This combined total of small business exports to Mexico 
and Canada accounted for 33 percent of total U.S. merchandise exports 
from small businesses in 2001.
    These increases in small business exporting are important because 
small businesses create two-thirds of new U.S. jobs, are responsible 
for much of our economy's innovation, and generate over half of our 
private gross domestic product. But while approximately two-thirds of 
U.S. exporters have fewer than 20 employees, less than one percent of 
our small businesses are exporting their products.
    A survey done by the U.S. Department of Commerce of more than 2,000 
non-exporting firms last year indicated that 30 percent of non-
exporting small businesses would be interested in exporting if someone 
pointed the way. In order to meet the needs of small and medium-sized 
firms and create a ``one-stop-shop'' approach, over the past year we 
have enhanced our working relationships with our partners in such a way 
that will guide and assist small businesses to have an even greater 
opportunity to trade abroad.
    Over the past year, SBA and Ex-Im have been very active 
implementing a ``Small Business Initiative'' Memorandum of 
Understanding. To leverage marketing resources, and to raise awareness 
among lenders and exporters, we have done a number of things. First, we 
held joint export symposia throughout the U.S., focusing on showing a 
streamlined approach to exporters.
    We have also been working on a joint marketing initiative and will 
soon be implementing the harmonization of SBA's and Ex-Im Bank's Export 
Working Capital loan programs. Coordination with other federal agencies 
is one of the best ways to achieve an increase in small-business trade 
participation.
    Another example of inter-agency coordination is our work with the 
Overseas Private Investment Corporation. SBA participated in a Trade 
Investment Forum in Arizona that reached out to our small business 
exporters and introduced them to all the SBA and OPIC products and 
services that are available. We see this as just the beginning of this 
very important partnership and only see it getting stronger.
    The ability to work very closely with the Department of Commerce 
while reaching out to the small business community has been very 
rewarding and has shown results. I have had the opportunity to 
participate with Secretary Evans on several trade missions which 
focused on opening new market opportunities for small business.
    One success story is Don Metz, owner of Metz Tool and Die in 
Chicago, who received a significant order for his products as the 
result of a trade mission to Mexico last year. SBA helped the business 
owner participate in that mission, arranged business-to-business 
meetings for him with prospective Mexican SME trading partners, and has 
subsequently provided export working capital loans as he has 
successfully concluded contracts and delivery to Mexican buyers. SBA 
has also supported the U.S.-Mexico Partnership for Prosperity 
initiative and its related Good Partner program.
    During fiscal year 2003, SBA counseled and trained more than 13,000 
small business owners on opportunities in exporting. These small 
business owners generated $110.4 million in export sales. We also 
provided small businesses with the necessary capital, through our loan 
guaranty programs, to consummate their international transactions. Last 
year SBA guaranteed 1,658 loans to exporters who generated another $1 
billion in export sales. That's a total of $1.1 billion in sales made 
by businesses that SBA supported through its technical and financial 
assistance programs. Already to date this fiscal year we are near 60% 
of our goal and we expect to surpass last year's successes.
    Reaching out domestically to the export community has also been a 
high priority between SBA and the Department of Commerce. For instance, 
we have successfully participated in major domestic trade shows, trade 
finance seminars, and direct mail campaigns.
    The North American Free Trade Agreement has proven to be extremely 
successful in expanding opportunities for small businesses, yet more 
work remains to be done. SBA looks forward to continuing its work with 
other Trade Promotion Coordinating Committee (TPCC) agencies to make 
sure the coordination of trade promotion and financing programs meet 
the needs of our small business exporters. We are also fully committed 
to supporting the President's overall international trade agenda as it 
continues to provide opportunities for small business. There has never 
been a better time to make sure U.S. small businesses continue to be 
the most competitive companies in the world. In 37 U.S. states, at 
least 80% of all exporters are small and medium businesses (less than 
500 employees.) In every state, the majority of exporters are SMEs; and 
in 32 states SMEs export $1 billion or more. These statistics 
demonstrate the important role of small businesses in the international 
market place, and SBA is determined to facilitate this valuable 
contribution.
    I look forward to SBA's ongoing contribution to the 
Administration's trade agenda and our commitment to evaluate and better 
coordinate our programs. I would be happy to answer any questions you 
may have. Thank you.

    Senator Hagel. Administrator Rosales, thank you.
    Mr. Rosales. Thank you, sir.
    Senator Hagel. Since presently there are just two Senators 
here, if it's acceptable to my friend and colleague from 
Minnesota we'll do 10-minute rounds, and we'll see if we can 
get through the questions that we need to address to the first 
panel. We know Secretary Aldonas needs to be out of here at 
3:30 or he'll have no job.
    Mr. Aldonas. That might be a better option.
    Senator Hagel. Senator Coleman's going to be very easy on 
you.
    Secretary Aldonas, would you address a little bit--and we 
heard some general references in your testimony to this point, 
but it would be helpful, I think, for you to go into some 
detail on the effect NAFTA has had in the manufacturing sector. 
Or have we had successes in creating jobs in the manufacturing 
sector? I ask that as the opening question because there has 
been a great amount of disinformation, misinformation, 
ignorance about that issue. And from your perspective, one 
who's had an immense amount of experience in this area over the 
years working in different agencies of the government, see if 
you can help frame this up and give us some perspective.
    Mr. Aldonas. Thank you, Mr. Chairman.
    I think the best way to look at it is through the lens of 
some of the sectors. If you take a look at, for example, in our 
auto sector, one way to measure it is simply whether you have 
seen declining employment? Have you seen increased shipments? 
What are the facts that are going on there? And then how do you 
distinguish those from what's going on in manufacturing, 
generally.
    I happen to be from Minneapolis originally, and right 
across the river, in St. Paul, is a plant that has been open 
for business ever since I was in high school, and pumping out 
Ford Ranger trucks. It happens to be the best-selling pickup 
truck in the world. Nobody's ever had a layoff. But the 
employment has gone down, even while they were exporting more 
to Mexico. And, as you know, that's a phenomena that has been 
going on in manufacturing, globally.
    In fact, interestingly enough, in the United States, we've 
actually had smaller job declines in the manufacturing sector 
than many of our major trading partners--China, Japan, Brazil 
included, where they're all significantly higher.
    And so I think it's always important first to disaggregate 
the effects with respect to what's going on in the 
manufacturing sector, generally; because as our productivity 
rises, that plant in St. Paul is producing more trucks with 
fewer people. That doesn't mean that we're no longer 
competitive in that environment.
    Now, what has NAFTA done to that sort of arrangement? Well, 
a couple of what I think are very important things. What NAFTA 
really allowed us to do is rationalize our production on a 
North American basis. It's not only just the fact that the 
barriers got dropped to Mexico. I know when I was a Foreign 
Service officer, I basically had to buy a vehicle that was made 
in Mexico if I wanted to drive it around down there, and that's 
why you had this dramatic shift upward, in terms of our exports 
of autos, as soon as the NAFTA went into effect.
    But the far more powerful economic phenomena is that on the 
North American basis, our industry is now much more competitive 
than it ever was before. By rationalizing its production, it 
takes advantage of not only a broader market, but a broader 
platform in which to operate.
    Has that meant job shifts as a part of that? Absolutely. 
Has it also meant increased employment, generally? Yes. And 
what I mean by that is the fact that you see that, for all the 
guys who are now producing in Mexico, what you're also seeing 
is an enormous amount of exported parts out of the United 
States. You've also seen capacity that was in Mexico come back 
to the United States. A good example is the Dodge Durango plant 
up in Delaware, where they made a choice in an investment; 
whereas, without having the barriers that once existed in 
Mexico, they no longer had to think about investing there to 
ship into that market. And, as a consequence, one of the 
hottest-selling vehicles in America is now manufactured in 
Delaware rather than in Northern Mexico. But, ultimately, it's 
about the strength that it gives us as a platform, overall.
    And if I could, just to add to that, it also points to the 
direction that I think we need to go with Mexico. Where we 
haven't seized the opportunities in NAFTA is about talking 
about the internal reforms that have to continue, to make 
ourselves more capable, frankly, of taking advantage of this 
North American marketplace. A lot of that has to go on in 
Mexico, but it has to happen here in the United States, as 
well.
    When we went across the country to 23 cities talking about 
manufacturing, the thing that astonished me most was the extent 
to which, in talking with manufacturers, large and small about 
the challenges they faced. They talked a lot about trade, and 
they talked about the advantages of NAFTA, but almost to a 
person what they identified, at the end of the day, as the 
biggest challenges were things that we most had to do to 
increase our competitiveness, including in our autos, were 
things that we have control of ourselves. It was things like 
tort reform. It was like a tax system that has a rate that's 
higher than Sweden's. It was things like healthcare reform. It 
was things like the asbestos bill that I know is on the Senate 
floor. It's like an energy plan to bring costs down. What they 
were saying is, let's make this the best place in the world to 
invest in manufacturing. I think NAFTA has been a part of that. 
I think it's going to be a continuing part of it. But it still 
requires a push, really, among all three countries, to drive 
further toward putting ourselves in the most competitive 
position we can.
    Sorry, I know that was a long-winded response.
    Senator Hagel. No, that was important, because you 
broadened the lens, as you noted--perspective.
    Quickly take us through other manufacturing industries that 
have gained, and, in particular, the manufacturing industries 
that have lost, in your opinion, whether it was regarding 
specifically its relationship to NAFTA, or some other trade----
    Mr. Aldonas. Sure. Down the line, what you'd see in 
manufacturing is that there have been gains from NAFTA. It's 
true in the IT sector. There have been gains from NAFTA in the 
construction sector. There's a variety of things--the sore 
point, frankly, is in the textile and apparel industry, much of 
which comes out of factors other than NAFTA, which I think is 
important to differentiate, because NAFTA does get a bad name, 
in large part because of the impact on the textile sector.
    I've spent a lot of time with the textile industry, both 
when I was here in the Senate on the Finance Committee and now 
in my current position, and I have to say that there were a 
number of companies that really did try and take advantage of 
NAFTA, invested on both sides of the border, rationalized their 
production, looked at Mexico as 86 million customers, not 
simply as a defensive proposition. And they're succeeding in 
the marketplace, even relative to Asian exports to the United 
States that have a very significant advantage because of what 
happened with the Asian financial crisis.
    That said, it's also important to note that in the textile 
sector you had a big increase in shipments, initially based on 
NAFTA, but they've taken a hit recently. You still have folks 
who can compete. Al Frink, who was nominated recently as the 
Assistant Secretary for Manufacturing and Services, happens to 
be a carpet manufacturer. Nobody would say that California is a 
low-cost jurisdiction to a manufacturer in this country, right? 
The fact of the matter is, he's producing there, and exporting 
to some of the most difficult markets in the world, and is 
using Mexico as one of the principal markets to give him scope, 
give him scale, so he can compete globally. So even in those 
industries like textiles, there's an advantage, but you have to 
be prepared to seize the advantage.
    For those who have looked at NAFTA much more as a defensive 
exercise, it's been a much more difficult road. And behind the 
protective walls that I think we've had in place for 40 years, 
you have a highly fragmented industry that has a hard time 
gaining the kind of scale that would allow it to compete when 
the quotas come off a year from now.
    But almost across the board in the manufacturing sector, 
apart from textiles, you've seen some significant increases 
through this rationalization process, and the ability to set 
themselves up for global competition.
    Senator Hagel. Thank you.
    As we are, and have been, exploring the specifics, and, in 
some cases, negotiating the final stages of FTAA, CAFTA, what 
lessons can we learn, should we learn, have we applied to those 
arrangements regarding looking back on the last 10 years of 
NAFTA?
    Mr. Aldonas. Let me talk about some of the institutional 
structures and then come back to a basic point about the 
political debate on trade.
    In terms of what lessons we should apply, early is better. 
Frankly, the delays, in many instances--if you take Mexico's 
agriculture sector--by postponing the reforms and not preparing 
for what eventually would come, and deferring change, in fact, 
they, in many ways, left themselves in a worse position to 
grapple with the change that will now come as the tariffs 
finally come off on many of their sensitive products. So as we 
think about future agreements, while there's always an instinct 
to try and grapple with the sensitive products, the truth is 
that the dentist who pulls your tooth slowly doesn't do you a 
favor. It's the sort of thing where you have to grasp the 
nettle earlier.
    On institutional structures, I have to say there are some 
things in NAFTA that have proved problematic that we've tried 
to grapple with. We have to recognize, as you pointed out, Mr. 
Chairman, they'll always be involvement. A good example is on 
the investment chapter where there were things that we need to 
do to make sure that the investment chapter works for our 
investors, but, at the same time, areas like defense 
procurement and things like that are covered in a way that 
doesn't represent a threat from the point of view of our 
economic interests or security interests, things of that 
nature.
    I'd say the same thing about Chapter 19, which deals with 
the sensitive topic of countervailing duties and anti-dumping. 
It's a model that worked, I think, in the case of Canada and 
Mexico. It's not a model, on the other hand, we should extend. 
And I say that based on my personal experience as a lawyer 
under that framework, where I will say honestly the scrutiny 
that you've got under Chapter 19 is different than what you've 
got in domestic courts. And that wasn't the idea when we 
originally set this up. So as we go forward, I think the way in 
which we think about the structural arrangements is important.
    The last thing is about the political debate. You know, I'm 
one who--I wasn't in government at the time--felt that the 
proponents of NAFTA at the time oversold it, and, in many 
respects, focused just on how many jobs it was going to create. 
And, in one sense, they set themselves up, because, in fact, 
what trade does, as we all know, is it shifts the pattern of 
production. It's not always a net-job gainer in that sense, 
although it has been in the case of NAFTA. The more important 
thing is whether it releases resources back into our own 
economy that will be invested more productively. And, whether 
we will succeed in competing globally as a result.
    Increasingly, when we think about trade, I know that there 
is a reason why we try and distill the debate down to this 
level, but the most important thing we can do is always keep it 
at the point of saying, the goal is a more productive economy 
and a rising standard of living. And trade does that, even when 
the debate about jobs is critical, like it is right now.
    Senator Hagel. Mr. Secretary, thank you.
    Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman. And I do want to 
begin by thanking you for holding this very important hearing. 
May 20 of last year, I actually held my first hearing as 
chairman of the Subcommittee on Western Hemisphere, Peace 
Corps, and Narcotics Affairs, and also focused on some of these 
trade issues, so it's nice to be able to revisit.
    I was going to ask Secretary Aldonas how is his hearing, 
and whether he has heard that great sucking sound that was 
supposedly coming out of this country.
    I'm concerned about a number of the issues relating to 
trade, but I think it's important to note that--and it's in the 
materials here--if we repealed NAFTA today, the drain on the 
U.S. economy would be to the tune of about $8 billion a year. 
And I can't imagine anybody wanting that result. But there is 
so much rhetoric about this issue, and I appreciate the 
chairman's questions trying to kind of cut through that, and I 
hope we can cut through it and not throw the baby out with the 
bath water.
    Secretary Aldonas, in your testimony you talked about the 
impact, dealing with the dislocations. And I appreciate that. 
You know, perhaps a commercial here, but Senator Baucus and I 
have introduced a Trade Adjustment and Assistance bill to 
expand TAA to services as a result of making some other 
improvements in the original TAA bill so that we deal with some 
of the problems associated with trade while continuing to move 
forward with trade.
    I was encouraged by what I saw as some early signs from 
Ambassador Zoellick talking about this issue of trade 
adjustment, authority, and perhaps expanding it to services. I 
don't know whether there's an official position. I do know that 
the information-technology folks and the business roundtable 
folks have both advocated expanding trade adjustment authority 
to services, and I just would appreciate your reflections on 
that effort.
    Mr. Aldonas. A couple of things. First of all, I applaud 
the motivation behind it, because I think unless we are 
grappling with the adjustment issues--and, frankly, are 
perceived to be grappling with the adjustment issues--we won't 
maintain the public support for what is the right policy, in 
terms of trade liberalization. So it's essential, not only 
because of the practical impact on people's lives, but in the 
broader political impact of how you maintain support for what 
we should do, economically.
    I haven't had a chance to look at the specifics of the 
proposal. Obviously, there's a lot of sympathy with respect to 
grappling with what's going on in the services side of the 
economy, as they are now facing increasing competition, as 
well.
    The one cautionary note, I have to say--and this--take it 
from an old Senate Finance Committee hack as a staffer, I guess 
would be the best way to put it. The guts of the TAA program is 
pretty complex, and I'm pleased to hear that what you're 
thinking about is how you modify it internally. Because really 
what we need in the country is something that acknowledges we 
will continue to be adjusting--not just because of trade, but 
continue to be adjusting forever. Things are no longer static. 
It's the sort of thing where I know, as my children are 
graduating from college and getting out into the job market, I 
can tell them, ``Look, it's going to be five jobs''--certainly 
more than I've experienced--over their lifetime. To do that, 
and to keep them in the mix, it's going to require this 
continual effort over time.
    And in that sense, I'm not sure that the TAA program, which 
can be horribly complex, and, as you know, has got these 
problems where you're forced out of the job market for 18 
months to take the training, and then your extended 
unemployment insurance runs out before you can complete the 
training, things like that don't make sense. It's complex for 
the individual to get through. That's one of the reasons why I 
think, from the point of view of our unions, they have become 
the primary delivery mechanism for a lot of TAA because you 
need someone there who can help you sort your way through the 
complexity of the system.
    Actually, what's needed is a system that is far simpler, so 
it's more easily accessible and acknowledges the fact that a 
lot of the transition we're going to see is not simply by 
virtue of trade, but much broader changes throughout the 
economy due to technology and a variety of other factors.
    Senator Coleman. And there's always a challenge for our 
legislation to provide that kind of flexibility.
    Mr. Aldonas. Exactly.
    Senator Coleman. I want to address one issue of concern 
with trade and with NAFTA. I know that Ford plant very well. 
I've been the mayor of St. Paul. And, by the way, it was the 
largest property-tax payer in St. Paul.
    So that operation is very important. Minnesota is also a 
large exporter of pork. In fact, I think we're the No. 3 pork-
producing state in the nation. I think Mexico is the No. 2 
importer of U.S. pork. And, in particular, I want these trade--
you know, this is the reason why NAFTA is good for us. And 
Administrator Terpstra talked about the impact of what's 
happening in the agricultural sector.
    Last fall, Chairman Hagel, myself, and others were involved 
in a--I think 34 Senators joined myself and Chairman Hagel, 
expressing concern about Mexico initiating an illegal 
antidumping case. And we want to make sure that the 
administration uses all means necessary to make sure that 
Mexico does not illegally restrict U.S. pork exports.
    I would like, Mr. Chairman, for the purposes of this 
record, that the copy of that letter be entered into the 
record.
    Senator Hagel. It will be included in the record, Senator.
    Senator Coleman. Thank you, Mr. Chairman.
    [The letter referred to follows:]
    
    
    
    Senator Coleman. And given that, could you give me a sense 
of what the administration can do on--where we have those 
problem areas, particularly in this case of the pork and the 
antidumping case?
    Mr. Aldonas. Two things. One is the fact that, as both Tony 
and Ellen pointed out, we have this ongoing dialog, and that 
the environment in which we operate with our colleagues, both 
in Canada and the United States, is a very close one, it makes 
it much easier to lay our issues in front of our trading 
partners, and to get satisfaction, I might add.
    As you may know, the particular order has been in abeyance 
since you wrote the letter and some of our first conversations 
with the Mexicans. It is problematic, in terms of the 
assertions it makes. We are deeply skeptical about it. And, 
frankly, I think our colleagues on the Mexican side have 
reflected that same skepticism, in terms of the way they've 
treated the case.
    Now, would we prefer to have it shut off completely? 
Absolutely. And end the threat, the chilling effect--pardon the 
pun--with respect to our pork in terms of what's going down 
there? Yes. And, as a matter of fact, Secretary Evans is 
meeting with Minister Canales right now and raising this issue. 
So it is that kind of environment where I think we can meet, 
discuss the problems, and try and resolve them.
    There's a broader point, too, about the dumping action, 
which I know, since both of you represent agricultural 
producing states, I have to say, as the person who is 
responsible, along with Jim Jochum, for administering our 
unfair-trade laws. One of the greatest causes for concern I 
have is the laxness in the way these things are administered 
elsewhere. And the place where we feel hit is in some of our 
most competitive areas, and those are agriculture. So whether 
it is pork, in the case of Mexico; whether it's chicken parts, 
in the case of South Africa; whether we're seeing increasing 
use of it in India, China, and a number of other places, this 
is going to become a serious issue that we're going to have to 
come back to, particularly through the lens of the most 
competitive agriculture sector in the world.
    Senator Coleman. Thank you. I know you have to leave, and I 
have to question other witnesses while you're here, Secretary 
Aldonas, just kind of a bigger-picture question. Can you just 
talk a little bit about when it has worked--what has worked, 
what hasn't worked, and are there some missed opportunities out 
there that we can now focus on, begin to take advantage of?
    Mr. Aldonas. Sure. Actually, Tony referred to one that I 
think is critically important. And, again, there's really two 
components to it. It's aviation and, I would say, 
transportation, generally. I know we've had a debate about 
trucking. But the truth of the matter is, we live in a North 
American market, and what we have to do with things like 
aviation is, frankly, move toward an open-skies arrangement. 
And as a part of that, not only think about the benefits that 
that will create for people who want to invest in North 
America--not just the United States, but in North American 
production--because we'll have that advantage, in terms of how 
they can move goods and how they can move personnel within the 
North American market.
    The flip side of that is, you've got the FAA and the 
Department of Transportation conducting a study about what our 
air-traffic control system will look like in 25 years and, 
frankly, the steps we need to be taking now to put that in 
place. The truth of the matter is, that's a discussion that we 
should be having with our trading partners in North America. It 
would match the regulatory side with what we should do on the 
trade side. And our ability to have a dialog about those 
regulatory issues is what's been enhanced as a result of the 
cooperation with both Mexico and Canada.
    Senator Coleman. Thank you, Secretary Aldonas.
    Secretary Wayne, I ran across something strange last week, 
and I need a little clarification, and my 6,000 Minnesota corn-
growers need a little clarification. There is something called 
the North American Commission for Environmental Cooperation 
Joint Public Advisory Committee--it's a mouthful--released a 
letter dated April 13, 2004, advocating a moratorium on 
importing transgenic or biotech corn into Mexico.
    Mr. Chairman, I would ask that a copy of that letter be 
entered into the record.
    Senator Hagel. It will be included in the record.
    [The letter referred to follows:]

                             Joint Public Advisory Committee (JPAC)
                          Comite Consultivo Publico Conjunto (CCPC)
                             Comite consultatif public mixte (CCPM)
                                                      13 April 2004

The Honorable David Anderson
Minister of the Environment (Canada)

Ingeniero Alberto Cardenas Jimenez
Secretary, Secretariat of the Environment and Natural Resources 
        (Mexico)

Administrator Michael O. Leavitt
Administrator, United States Environmental Protection Agency

RE: Maize and biodiversity symposium of the Commission for 
Environmental Cooperation

    Dear Council Members:

    The Joint Public Advisory Committee (JPAC) was pleased to 
participate in the CEC symposium on maize and biodiversity, held on 11 
March 2004, in Oaxaca, Mexico. The event drew hundreds of participants, 
many of whom were indigenous peoples and campesinos who are directly 
affected and very much concerned with the issue of transgenic maize in 
Mexico. The organizers are to be congratulated for facilitating this 
broad representation.
    The symposium succeeded in bringing a ``human face'' to this very 
complex and controversial subject. Discussion at conferences and 
similar gatherings often tends to focus on scientific and technical 
aspects rather than human impacts and consequences. What we learned 
from our participation is that the conservation of biodiversity cannot 
be separated from the protection of cultural diversity. A better 
understanding and respect for the human and social context is called 
for in this debate. Indeed all analyses should be based on a broad 
understanding of sustainable development and the interplay of 
environmental, economic, social and cultural impacts.
    In this context, we have several important thoughts and 
observations to share with you as the report is being finalized.
    The first is that the emphasis on ``scientific method'' and 
``science based'' conclusions can work to exclude indigenous peoples. 
The scientific method is based on a western worldview that is 
predomiantly limited to the physical world that sees its objects of 
study as inanimate things. Since most of the Western World is based on 
the scientific method, its institutions of government, industry, 
business and academia are, for most part limited to this worldview. 
Although scientists often claim that their study is objective, they 
express their values through their work. Unfortunately when western 
scientific methods interact with indigenous worldviews, its own 
institutional biases and ethnocentric values become apparent. The 
indigenous worldview, as we were told, includes the spiritual, the 
emotional, the intellectual and, of course, the physical. The arguments 
expressed by participants at the symposium clearly articulated how 
traditional food production and consumption are expressions of cultures 
that have been sustained by a respect for nature rather than a desire 
to control it.
    It was also quite apparent at the symposium that the authors of the 
various chapters were unable to respond to the many indigenous 
presenters who attempted to discuss and articulate their relationship 
with maize as sacred, the center of life, their brother and part of 
their dignity and identify. We must also not underestimate the 
intellectual capability of the indigenous people in the region. Their 
understanding of maize biodiversity is based on 6,000 years of 
practice, observation and spiritual insight. Their opinions on the 
effects of transgenic maize should be carefully considered and 
evaluated.
    Secondly, there is an obvious imbalance in the composition of the 
Advisory Group. The majority of the members are from academia, industry 
and NGOs. Indigenous people are a minor component of the Committee. 
This imbalance fails to recognize the importance and the significance 
of indigenous thought in addressing this question. Disqualifying 
indigenous people on the basis of language and scientific credentials 
is, in our opinion, a form of institutional discrimination. Ideally, 
there should have been an equal balance of indigenous peoples and 
scientists on the Advisory Group.
    This imbalance may result in the promotion of a position that is 
directly contrary to the views of the indigenous peoples in the area. 
Western institutions have great faith in the scientific method. 
Indigenous peoples, for most part, are sceptical of western science 
and, instead, they have great faith in their own traditional practices 
and methods.
    We learned much about scientific uncertainty at the symposium, both 
from the formal presentations and from the public interventions. JPAC 
is expecting that the final report will address the scope of this 
uncertainty. There is a very strong case to be made here for 
governments to apply the precautionary principle in their decision-
making processes, to require that industry be comprehensive when 
submitting rationale and to create space for public debate. Minimally, 
a moratorium on imports of transgenic corn to Mexico should be put in 
place until the risks to human health, cultural integrity of maize 
producers in Mexico and the environment generally are better understood 
and appropriate long-term decisions can be made.
    Finally, we are very concerned about the analysis of benefits and 
risks discussed at the symposium. It appears that the corporations 
share most of the benefits and the producers and the environment share 
most of the risks. It can be argued that the identification of benefits 
and risks is a value judgment, thus great care should be taken about 
how these benefits and risks are described.
    We are looking forward to the publication of this report and a 
fulsome discussion on the contents of the final report and 
identification of specific follow-up actions during the June Council 
Session in Puebla, Mexico.

            Sincerely,

    [Original signed]

                                              Donna Tingley
                                                JPAC Chair for 2004

    Senator Coleman. Now, apparently this CEC JPAC is composed 
of 15 members, five of whom are from the United States and 
appointed by our government. And these members act 
independently, as I understand it, and their responsibility is 
to provide the CEC, which is comprised of environmental 
ministries from each country, with their advice on all matters 
within the scope of the North American Agreement on 
Environmental Cooperation.
    My concern is that we seem to have five U.S. members on 
this committee who are part of a letter taking a position that 
is totally contrary to official U.S. policy and, I would think, 
to my Minnesota farmers' economic interests, and what I think 
is contrary to sound science. And----
    Senator Hagel. Senator Coleman, may I interrupt just a 
moment? Pardon me. I wanted to thank our expert witness and 
friend, Secretary Aldonas, who I know you know well, and we 
acknowledge your, as always, contributions and input. Thank you 
for your good work.
    Senator Coleman. He's a proud product of Minnesota, Mr. 
Chairman. Thank you very, very much.
    Senator Hagel. You can escape.
    Senator Coleman. And I would ask, then, a series of 
questions to Assistant Secretary Wayne, and perhaps 
Administrator Terpstra might help me better understand what's 
going on here.
    Does JPAC, or CEC, have any role relation to NAFTA? That 
would be my first question. Why don't I just kind of lay out 
the three questions. You could, kind of, pull this together for 
me. Is there any other information you're aware of provided by 
the JPAC to the CEC? And if so, how is that information being 
used? And a third question, what steps are you taking, what 
steps need to be taken, if any, to ensure that biotech products 
approved for commercialization in the United States have access 
to Mexico?
    Mr. Wayne. Well, thank you, Senator. In fact the JPAC is an 
advisory committee, and that's what it is. It's an advisory 
committee to the NAFTA environmental ministers.
    They have put forward a letter with which we have a number 
of serious problems and questions as it describes transgenic 
corn and shipments to Mexico. This is the same corn that we all 
eat on a regular basis, safely, from both a human-health 
perspective and from an environmental perspective.
    I understand that, indeed, right now some of our colleagues 
in the Environmental Protection Agency are working on a 
response to that letter, which would be a U.S. Government 
response. We will, of course, coordinate with the governments 
of Mexico and Canada in this response, pointing out what we 
think are the shortcomings in this advisory opinion. And I know 
that Under Secretary Terpstra may have a few other comments on 
that.
    In general, however, I can say we are extremely vigilant in 
supporting the use of a scientific basis for judging any 
genetically modified crops that are out there. We have a very 
good system in the United States. We work, on a regular basis, 
not just in North America, but around the world, to explain the 
benefits of that system and that when we are using corn and 
other approved genetically modified organism [GMO] products, we 
do believe them quite safe, and we use a very rigorous 
scientific method in pursuing that.
    And so we, on a regular basis--in fact, I have a gentleman 
who works for me who travels around the world on a regular 
basis explaining this to other countries, and a number of 
colleagues at USDA and elsewhere have exactly the same mission, 
and we're certainly doing it in the context of NAFTA.
    I don't know, Ellen, if you want to----
    Ms. Terpstra. I would just add that we have a very 
concerted effort, working with our NAFTA trading partners, to 
gain a common view and export opportunities around the world 
common positions for biotech products, and that's a very 
productive, good relationship.
    Senator Coleman. It just seems to me--I know my time's up, 
Mr. Chairman, but if I may, one brief comment on this, and that 
is that if you read the letter, it talks about minimally--
minimally--a moratorium on the imports of transgenic corn to 
Mexico should be put in place until the risks to human health, 
culture integrity, et cetera, et cetera, environment, are 
generally better understood and appropriate long-term decisions 
can be made. To me, this is an issue that we have studied, that 
we have very clear policy. We struggle with the Europeans to 
clarify some of the decisions and judgment that they've made, 
and they seem to be moving now in the right direction.
    So to have folks who are representatives of our government 
working in an advisory capacity, raising questions about issues 
that I think we have put a lot of time into trying to clarify, 
and say this is sound science, and that these GMOs do not 
present risks to human health, I just find it very troubling.
    Ms. Terpstra. If I could just add, our understanding is 
that the U.S. members of that advisory committee did not 
support that letter and that was largely a personal opinion 
written by the author of the letter.
    Senator Coleman. That's very helpful, Administrator 
Terpstra, thank you.
    Thank you, Mr. Chairman.
    Senator Hagel. Senator Coleman, thank you.
    Secretary Wayne, you noted, in your prepared remarks, the 
impact NAFTA has had on U.S. border security in the post-
September 11 environment. Could you elaborate on your points? 
How, in fact, has NAFTA impacted and achieved better security 
on our border with Mexico?
    Mr. Wayne. Thank you, Senator. Well, first, I would note 
that, of course, long before September 11 took place, we were 
paying a lot more attention to our borders. I had the privilege 
of being the Deputy Assistant Secretary overseeing Canadian 
relations at one point in the mid-1990s. And, of course, there, 
as on the southern border, we were already paying a tremendous 
amount of attention to the Customs issues, to the border-
crossing issues, because there was a lot of great importance 
going on--both the criminal threat; of course, the illegal 
immigrant threat, especially in the south--but also the 
importance of having commerce flow effectively, smoothly, and 
effectively.
    So we already had this great deal of dialog on both 
borders--in different contexts, and working in different ways. 
So there was a basis there that after the tragic events of 
September 2001, people really knew each other. They knew what 
the problems were, they knew what the challenges were, and they 
were able to take a new look at what this now meant in the 
post-September 11 period.
    So in December of 2001, the United States and Canada had 
already gotten together, and they launched a 30-point action 
plan to create a secure and ``smart'' border, a border where we 
could be more secure in the people and the goods that were 
crossing, and, at the same time, do it in a smart way, a way 
that was eventually going to get us a more efficient way, that 
would be economically efficient, that would save money, but 
we'd also have a real sense that there was a check on what was 
crossing, both people and goods.
    We deployed additional immigration officers, we worked more 
closely to start discussing our visa policies and see if we 
could move closer together. We expanded information-sharing, 
started developing common standards for passenger screening. 
Canada was the first country to join us in our container 
security initiative.
    So an awful lot very important happened in that area, and 
that includes--there was this innovative program called a NEXUS 
program of ``trusted travelers'' that we already had going for 
high-volume border crossings. And so we started looking at that 
to make that more serious as we went forward.
    Similarly, on the Mexican border, we started, in March of 
2002, a U.S.-Mexico border partnership that--with the same 
notion--we're going to improve the infrastructure at the ports 
of entry, we're going to look at ways to expedite legitimate 
travel while identifying illegitimate travel, and to increase 
the security in the movement of goods.
    So both of those processes are going on in a very intense 
way. I don't participate in those, but a number of my 
colleagues do. And I know that there are regular meetings, 
regular exchanges. There are--of course, in any exchange, there 
are things that they can do easily, and there are things that 
take longer to do. But this is making an important contribution 
to our homeland security. And the fact that we already had 
NAFTA there and were working built the relationships and 
reinforced the interests on both sides of the border to making 
this work.
    Senator Hagel. Thank you.
    Administrator Rosales, you noted, in your testimony, some 
specific examples of availability of trade finance programs for 
small and medium enterprises. Would you focus on that area 
here, for the next minute or so, in explaining some of these 
programs that are available for the small and medium 
enterprises to take more of an advantage of, specifically 
targeted within the framework of NAFTA and other FTAs.
    Mr. Rosales. Yes, Senator, thank you very much.
    The Small Business Administration's export financing 
programs are broken down into three groups. They're all subset 
of our 7(a) program. One is the Export Working Capital Program 
that guarantees up to 90 percent of the loan, up to a million 
and a half. I think we just raised the cap on that. The other 
is an IT loan, international trade loan, with a million-point-
one. And then the other is what we call the Export Express. It 
allows an exporter to use financing for any export purposes not 
related strictly to working capital. It would mean--as an 
example, we've got a firm out of Los Angeles who utilized that 
particular product to go to a trade show in Korea, and he came 
back with $8 million worth of orders. So it's a very flexible 
product. I think the Express has been very well received by our 
bankers.
    The other aspect, though, sir, is that we also provide a 
lot of training and technical assistance to our small-business 
exporters, particularly to the banks, the lenders. As you can 
imagine, some of our rural-area bankers are not experts in 
trade finance, so our ability to assist them in developing the 
loan packages and the requirements to have an export backing by 
the SBA is very crucial to those banks.
    The field representatives tell us that major problems with 
the banks is the consolidations, that consolidations are going 
on. So if the SBA was not there to provide that trade financing 
and that trade counseling, it would be very difficult for some 
of these small businesses to be able to execute those 
transactions.
    Senator Hagel. Thank you.
    Mr. Rosales. Thank you, sir.
    Senator Hagel. Administrator Terpstra, what role, if any, 
did NAFTA play with regard to the resumption of the post-BSE 
[bovine spongiform encephalopathy] trade with Canada?
    Ms. Terpstra. I think fundamental to NAFTA is the 
foundation it gives us to have strong working relationships 
with our counterparts in Canada and in Mexico. Everyone, from 
the Secretary on down to the working level, to our scientific 
experts, has quite a bit of experience in interacting with our 
counterparts in Mexico and Canada. Thus, when you have 
something occur, like the case in Canada last summer, and then 
our case, just before Christmas, we're able to, I think, 
coordinate, communicate, talk about policies, talk about 
remedies, talk about opportunities to move ahead.
    One of the first actions the Secretary took, in terms of 
addressing the $3.8 billion worth of our beef exports that were 
put at risk by the finding of the BSE case here was to call our 
counterparts--Secretary Usabiaga and the new Minister Speller, 
in Canada--and to bring all of the experts together and talk 
about, how do we move forward in a coordinated position? So 
it's established relationships where I think you can very 
seriously, very quickly communicate to address very serious 
problems like we had with BSE.
    With Mexico, we feel that we've made probably the most 
progress, in terms of having trade resume for all of our 
markets. Today, about 70 percent of the value of our normal 
trade in beef and beef products has been able to be resumed 
with Mexico.
    We're working, I'd say on a weekly basis, with our 
counterparts in Canada to make sure that we coordinate our 
policies, our regulations, our view on trade affected by BSE, 
and we're looking at ways to move ahead in the international 
organizations to have a NAFTA-coordinated approach that we 
think would serve as a model to our other trading partners 
around the world.
    Senator Hagel. If I understood what you said, with your 
specificity, if we had not had a structure, a forum, like 
NAFTA, it is very unlikely that we would have made the kind of 
progress in dealing with not only BSE, but some of these other 
big issues we've had to deal with. Is that right?
    Ms. Terpstra. Absolutely.
    Senator Hagel. Does that summarize it correctly?
    Ms. Terpstra. Absolutely.
    Senator Hagel. Thank you very much.
    Secretary Wayne, what impact would you say, maybe two or 
three issues, in your opinion--NAFTA has had on political 
change in Mexico, specifically with the Fox administration? 
Good reform? Change? Open? Bad? Downside? What do you think?
    Mr. Wayne. I think, basically, it's created the open door, 
where reformers from all sides of the political spectrum could 
move forward and press for what they saw as needed economic 
reform. And I think President Fox took full advantage of that, 
within the limits of Mexico's system, to try to push forward on 
a number of fronts. He was more successful in some areas than 
in other areas, and that's the way politics are in every 
nation.
    But what we've found is that NAFTA, in and of itself, 
raised the debate of a number of issues. It raised the whole 
debate of transparency in the economic system. It raised, very 
clearly, the issues of competitiveness. It raised the issues of 
having to deal with all the cross-border issues, and, thus, 
what kind of facilitation was needed, and it forced decisions 
to take place. And it was in the interest of individuals within 
Mexico, from various sectors, to find good solutions to those 
issues .
    One of the interesting things, when I go to other places 
and talk about the possibility of having FTAs--and this holds 
true for NAFTA, too--is remembering that the FTA, NAFTA, is one 
tool that creates a set of opportunities. It's then up to the 
society and the economy to respond and use those opportunities 
well.
    We can see that there were a number of those opportunities 
taken up in Mexico. We also know that there is still a debate 
going on, and there's a whole other layer of challenges that 
still need to be faced. Of course, that's true in every 
economy, and ours, too, as Under Secretary Aldonas was pointing 
out. But what this did was really open up opportunities and 
create the interest in making changes. It helped get different 
parts of society behind reform.
    Senator Hagel. Thank you.
    Senator Coleman.
    Senator Coleman. Thanks, Mr. Chairman.
    Secretary Wayne, One of the issues with NAFTA is, there's 
still a lot of folks who have a lot of doubts about it. And I 
think it was in your testimony, you talked about being careful 
about overselling. Have we oversold? And I am just going 
through the staff memo, if you look at the staff memo, NAFTA--
modest affect on U.S. trade growth, one of several factors in 
the widening trade deficit, a slight increase in growth and 
productivity, has not greatly affected aggregate employment 
levels in all countries, but at least a half million jobs have 
been lost as a direct result of NAFTA; small effect on real 
wages. That's the staff memo, summary.
    How do we deal with the issue of overselling NAFTA? And if 
you can--I know you walked through this, but if you can give me 
the concise message to the folks who are saying ``slight impact 
on real wages,'' you know, ``negative impact on employment, 
slight impact on growth and productivity.'' Is it worth it?
    Mr. Wayne. The short message would say, yes, it is worth 
it, because--I'm going to echo Grant Aldonas here--what it has 
done is made us more competitive in a number of sectors, more 
able to compete in the world. Even though--for example, jobs--
even though the total number of jobs--you can debate, did it 
add or subtract--there's a lot of evidence that what it did is 
created higher-paying jobs in a number of areas. It created 
opportunities that wouldn't have been there for all three 
partners had we not started building this relationship so we 
could create the openings for our private sectors to work 
together. And that's the big difference.
    It's true, the United States has a massive economy, so the 
main mover in our economy is going to be what we do 
domestically and how the whole economy is moving, and trade is 
relatively small, especially with two partners, even though 
they're next-door partners. There is only a small impact, 
compared to the large trends in our economy. But it still is a 
net-plus for us as we go forward. And as we're working in this 
more-globalized world where we're really competing everywhere, 
it has been positive for us.
    Senator Coleman. And I would presume that you would agree 
with the assumption that it's in our interest to have a 
stronger Mexican economy, an economy in which there is greater 
transparency, greater adherence to the rule of law, which is 
required if you're going to compete in the global community.
    Mr. Wayne. I think that NAFTA has very much helped 
reinforce the reforms that are going on in Mexico, and those 
are all very much in our interest. It hasn't solved everything. 
That's why we're looking at other tools. We created the 
Partnership for Prosperity to start trying to help address some 
of the needs that are still out there, to help create growth in 
other parts of Mexico, not just in the parts that have really 
clearly benefited from NAFTA. There's a lot else to do, but 
this has been a plus, and it is very much in our interest. 
Senator, you're exactly right that we have a strong, 
prosperous--a democratic government with increasing prosperity 
in our neighborhood.
    Senator Coleman. Administrator Rosales, I am impressed by 
the upside potential for small business in trades. It's just 
kind of like we're scratching the surface. Have you had a 
chance to--I've obviously got a self interest in Minnesota--are 
there any stats that you know of the percentage of exporters in 
Minnesota classified as small businesses? Do you have any data 
on that?
    Mr. Rosales. Yes, sir, we do. Matter of fact, in 2001 
Minnesota had over 6,600 total exporters, of which 5,654 were 
small- to medium-sized businesses, or 84 percent, and it ranked 
15th in the Nation as a percentage of exporters.
    Senator Coleman. Any value of that, dollar value, of those 
exports?
    Mr. Rosales. The dollar value of merchandise and services 
show that Minnesota exported over $10.5 billion. May I also 
add, too, that NAFTA, for small businesses, if you look at the 
world of exporters in 1990, pre-NAFTA, you only had 60,000 
exporters totally in the United States; now, we're roughly 
220,000--97,000 are exporting to Canada and Mexico, and these 
are just SMEs.
    Senator Coleman. It would appear to me--you touched upon it 
in your testimony--there is this huge upside potential, but, 
for the small business who's just kind of struggling to make 
it, that need help in the marketing and the coordination and 
that kind of stuff. And obviously, it's something you do.
    Are there other folks in the private sector involved in 
facilitating that?
    Mr. Rosales. With the Commerce Department, you have the 
District Export Councils that are, appointed by the Secretary, 
who advise them on export-related issues from the private 
sector. Some states and municipalities do have international 
trade facilities within the states. My home state of 
California, unfortunately, just dissolved its trade agency. And 
in some instances, our SBDCs, the Small Business Development 
Centers, which are a resource partner of the SBA, as part of 
their goal and objective is to train and facilitate training on 
trade. And around 35 of those SBDCs are dedicated to 
international trade assistance. So we do--plus, our field force 
in our field offices, of over 70 in every state, have a 
component of international trade that they provide for our 
small businesses who are looking for counseling in that area.
    Senator Coleman. If I could suggest perhaps something else 
to look at, when I was mayor of St. Paul I worked with my 
colleges and universities, and the University of St. Thomas set 
up a small business advisory group to do many of the things 
that government does, but they were doing it through the 
university setting, providing advice, counseling--again, small-
business people--training. I don't recall us getting them 
involved in the trade-opportunity discussion. But, if you use 
St. Paul as an example, we've got ten colleges and universities 
there, and I would think that if small business has opportunity 
and we haven't maxed it, we've got a lot of upside potential, 
that it may be worth getting in touch with the academic side so 
that we can, kind of, bring more resources to the table to help 
better educate small business how to take advantage of this.
    Mr. Rosales. Yes, Senator, we are definitely doing that, 
and particularly with--like I said, our Small Business 
Development Centers are affiliated with universities, and what 
they do is, they provide the counseling on all aspects of small 
businesses--or how to get into business, or how to expand your 
business--but also in the international arena.
    That is one of the most crucial aspects, is to know how--
not just so much the financing of it, but how to. Because the 
international business is a little bit more complicated than 
your domestic business.
    Senator Coleman. And, last--it's a comment, rather than a 
question, for Administrator Terpstra--and USDA and USTR take a 
fair amount of beating on the Hill. We confess, on occasion, if 
I think that we're not being aggressive enough and doing all we 
can to unfair fair-trade practices, I raise some of those 
concerns. But I do know that the administration has encouraged 
the U.S. industry's sugar, corn, corn refiners, to get together 
and work with their Mexican counterparts, and I just want to 
express my appreciation for that effort. You know, you're 
obviously taking this seriously, and continue to work with the 
industry, but I find it very, very helpful, and I find it a 
very positive step, so I want to say thank you.
    Ms. Terpstra. Thank you.
    Senator Coleman. Thank you, Mr. Chairman.
    Senator Hagel. Senator Coleman, thank you.
    Lady, gentlemen, thank you for your taking the time today 
to offer some very helpful advice and very relevant summary 
testimony as we look back on this important trade agreement 
over the last 10 years, and what we've been able to explore in 
the way of what's ahead, what is in store for the future. 
Please convey to your colleagues in your respective agencies 
how much we appreciate your good work.
    Thank you.
    Mr. Wayne. Thank you.
    Ms. Terpstra. Thank you.
    Mr. Rosales. Thank you.
    Senator Hagel. If the second panel would please come 
forward.
    Welcome, nice to have all three of you here, and we 
appreciate very much you taking time, each of you.
    Some were here when I presented my opening statement. I 
introduced each you. But let me do that again, for those who 
were not here.
    We will ask the three of you to present your testimony in 
this order: Mr. Frank Vargo, vice president for International 
Economic Affairs, National Association of Manufacturers; Dr. C. 
Fred Bergsten, director, Institute for International Economics; 
and Ms. Thea Lee, chief international economist, AFL-CIO. Thank 
you.
    Again, thank you each for coming today and presenting your 
testimony. And if you would begin, Mr. Vargo, we'll take your 
testimony, the three of you, and then get into some questions.

 STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, INTERNATIONAL 
    ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. Vargo. Thank you, Mr. Chairman. And let me thank you 
enormously for holding this hearing, because there's been so 
much mythology, so much that has been misleading about NAFTA 
that we really need to turn the spotlight on so people can take 
a look at the facts and see what's going on.
    You know, it's so bad, Mr. Chairman--I was watching a movie 
the other night--great movie, by the way--called ``The Italian 
Job.'' And for no reason at all, in the middle of the movie, 
this character says, ``What's this country coming to when NAFTA 
can overrule the Supreme Court?'' Well, it can't. But you see 
that everywhere.
    You know, I'm convinced that there's going to be an 
outbreak of acne that's going to be----
    Senator Coleman. You should read my mail.
    Mr. Vargo. But, Mr. Chairman, you know, I think we can all 
agree that, in the years after NAFTA, if manufacturing jobs had 
gone down, if real compensation--the real hourly compensation 
had gone down, if productivity had gone down, we'd have to say, 
well, we've got to rethink this thing. But that's not what 
happened.
    You know, it--I want to break time in the year 2000, 
because--for reasons I'll get to in a moment--but up until that 
time, after NAFTA, we added about 500,000 manufacturing jobs; 
whereas, in the years before NAFTA, we had been losing them. 
Real hourly compensation--wages and benefits--grew twice as 
fast after NAFTA, as before. Productivity went up. We had an 
economic boom.
    Now, the detractors of NAFTA say, well, NAFTA had nothing 
to do with this. Well, you know, exports are important to this 
country, and, after NAFTA, the NAFTA countries, the two NAFTA 
countries, accounted for half--one out of every two--dollars of 
our export growth in that time period. That's not trivial. So 
NAFTA did contribute.
    Now, after the year 2000, manufacturing really took it on 
the chin. We've lost almost three million manufacturing jobs. 
That's about one out of every six. That's a calamity. Too many 
people say, well, that's because of our trade agreement. You 
know, we have lost these jobs to NAFTA. It's not so. And the 
most simple way to understand that is our imports of 
manufactured goods from NAFTA countries today are lower than 
they were in 2000. They're smaller, Mr. Chairman. So the 
popular image that America's factories are moving across the 
border to Mexico, and they're stopping production here, they're 
starting in Mexico, and they're shipping those goods across the 
border, why isn't it in our import figures? Presumably Customs 
is doing an accurate job. I believe they are. Those imports are 
smaller. NAFTA is not guilty in this.
    Now, our trade deficit with NAFTA did increase after 2000, 
but it's because our exports plummeted, and I don't have an 
answer for that. I do know it's not in the NAFTA agreement, 
because the NAFTA agreement lowered trade barriers, didn't 
raise them. And it's something that we, at the NAM, need to 
take a closer look at. And I hope you'll ask the Congressional 
Research Service and others, because we need those exports 
back. I think that it gets to, maybe, something that Senator 
Coleman said about doing more for export promotion. But it 
wasn't because of the NAFTA agreement.
    Now, we have all seen these ridiculous figures that the 
Economic Policy Institute has shopped all around and broken 
down by state, saying, ``700,000 jobs lost to NAFTA.'' It has 
nothing to do with the NAFTA agreement. Their analysis talks 
about the totality of imports from Canada and Mexico, and 
exports to Canada and Mexico, without making any effort at all 
to say, how much larger or smaller were they because of the 
NAFTA agreement? They leave the impression that these 700,000 
jobs were lost because of the NAFTA agreement, and that's 
absolutely untrue. Whether or not they were lost because the 
trade deficit with Canada and Mexico grew, I don't know. But I 
can tell you, Mr. Chairman, that since our imports from the 
rest of the world doubled during that time period it's logical 
to expect that they would have about done that from the NAFTA 
countries.
    Now, in fact, our imports from the NAFTA countries did grow 
somewhat faster than from the world, about 30 percent faster. 
But our exports to them grew twice as fast. So I draw the 
conclusion from that that NAFTA had more of an effect on our 
exports than our imports. I'm willing to get into debate and 
look at economic analysis, but I'm not willing to take 
seriously anybody's figures that say, ``700,000 jobs lost 
because of the NAFTA agreement,'' when they didn't even look at 
the NAFTA agreement.
    The second point on their analysis is, they say, well, 
phoof, this was all disguised until 2000 because the U.S. 
economy was doing so well, and NAFTA had nothing to do with 
that. Aha. But after 2000, that's when the effect showed up. 
But, Mr. Chairman, our imports of manufacturers from Canada and 
Mexico fell after 2000; they're smaller in 2003 than they were 
in 2000.
    Now, as far as investment, let me just bring out three 
figures. In 1983, Mexico accounted for 4.1 percent of our 
overseas direct investment in manufacturing. In 1993, just 
before NAFTA, that had grown to 4.8. It grew--in 10 years, it 
grew seven-tenths of 1 percent. What happened in the ensuing 
years? The latest figures show it grew from 4.8 percent in 1993 
to 4.9 percent in 2002. You know, there's no sucking sound.
    Our manufacturing direct investments in Mexico run a little 
over $2 billion a year, and that's something like 1 percent of 
the $200 billion a year that NAM members invest right here in 
the United States every year. There's no sucking sound.
    Certainly, American manufacturers did expand production in 
Mexico, but not as much as they did here in the United States. 
In the auto industry, for example, we created two jobs in the 
United States for every job that was created in Mexico, up to 
2000. And after 2000, the employment in U.S. manufacturing 
affiliates in Mexico began to fall, not rise, which is further 
evidence that the NAFTA agreement is absolutely the wrong thing 
to look at in looking for, ``Where did we lose our jobs?''
    Where did we lose them, Mr. Chairman? Well, our worldwide 
decline in exports of $70 billion is a good place to start 
looking. Seventy billion dollars is a lot of U.S. manufacturing 
production--had nothing to do with the NAFTA agreement. It was 
a lot to do with the overvaluation of the dollar, and I do want 
to credit the Economic Policy Institute for hitting that one on 
the head. They're exactly right.
    Mr. Chairman, the United States is a very open market. Our 
average manufacturing duties are less than 2 percent. That's 
not a trade barrier; it's a speed-bump, if that. Two thirds of 
our imports from the world come in duty free already, yet we 
face high barriers all around the world. The way we level the 
playing field, the way we make it easier for us to compete in 
the world is more trade agreements, not less.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Vargo follows:]

                Prepared Statement of Franklin J. Vargo

    Mr. Chairman and Members of the Committee:
    I am pleased to testify today on behalf of the National Association 
of Manufacturers (NAM) to provide a perspective on the North American 
Free Trade Agreement (NAFTA). The NAM represents 14,000 American 
companies, including 10,000 small and medium-sized companies. All of 
our members are affected directly or indirectly by trade and have a 
keen interest in the factors affecting our trade and international 
economic relations.
    I want to commend you, Mr. Chairman, for holding this hearing, for 
no other trade issue has been as misunderstood as NAFTA and no other 
trade issue has been subject to as much myth and hyperbole. My 
testimony today will show that not only has NAFTA not been responsible 
for all--or even any significant part--of the loss of nearly 3 million 
American factory jobs in the last three years, but also that NAFTA has 
been a plus for the U.S. and North American economies.
    My testimony highlights three extremely important facts: (1) up to 
2000, the U.S. manufacturing industry and manufacturing jobs did better 
after NAFTA than before; (2) U.S. manufactured goods imports from 
Mexico and from NAFTA did not contribute to the big job loss that 
started in 2000, for these imports are lower today than they were in 
2000; and (3) there has been no huge outpouring of U.S. investment or 
jobs to Mexico.

                          THE NAFTA AGREEMENT

    It is useful to begin by reviewing briefly just what NAFTA is. 
NAFTA, the North American Free Trade Agreement, is an agreement among 
Canada, Mexico, and the United States to liberalize virtually all 
restrictions among them in both trade and investment. NAFTA is 
basically about Mexico, as the United States and Canada already had a 
free trade agreement that had substantially eliminated barriers between 
our two countries. NAFTA aimed at eliminating almost all of the 
remaining trade and investment restrictions in North America within ten 
years of its entry into force, which was in January, 1994.
    It is not generally recognized that the United States was already 
very open to imports from Mexico before NAFTA even went into effect. 
Prior to NAFTA, half of our imports from Mexico already entered the 
United States duty-free. And the average U.S. duty on all Mexican 
imports was only 2 percent. That 2 percent figure is now down to 
virtually zero, as one would expect from a free trade area.
    U.S. exports to Mexico, however, faced an average duty of 12 
percent prior to the formation of NAFTA--a figure six times as high as 
U.S. duties on Mexican products. U.S. producers also faced a variety of 
other barriers in Mexico as well. Mexico's 12 percent duties on U.S. 
products have now been almost totally phased out. Mexico also 
eliminated many restrictions on foreign investment and made the country 
a more attractive place to invest. On the other hand, Mexico also ended 
a number of practices that had virtually compelled companies to invest 
in Mexico prior to NAFTA.

                 THE U.S. ECONOMY AND JOBS SINCE NAFTA

    NAFTA was intended to increase trade and commerce among the North 
American economies and, in the process, to build a stronger foundation 
for economic growth and innovation. In looking at whether it achieved 
this, it is useful to compare the seven years prior to NAFTA (1986-93) 
with the first seven years after NAFTA (1994-2000), and then look at 
the 2000-2003 period when the huge U.S. job loss took place.
    Jobs--Looking first at the job situation, what happened to 
manufacturing jobs during these time periods? Bureau of Labor 
Statistics (BLS) data show that in the seven years prior to NAFTA, U.S. 
manufacturing jobs didn't fare very well. In fact manufacturing 
employment fell by 778,000 jobs. However, in the seven years after 
NAFTA, U.S. manufacturing employment rose by 489,000 jobs. Yes, 
America's manufacturers added 489,000 jobs after NAFTA--reversing what 
had happened during the previous seven years.
    Now what about the 2000-2003 period? During those three years, U.S. 
manufacturing employment dropped an astonishing 2.7 million jobs--
meaning that one in every six men and women working in America's 
factories lost his or her job. Reversing this trend and restoring 
healthy growth to the U.S. manufacturing industry is the NAM's top 
priority. I will return to this priority at the end of my statement, to 
focus the subcommittee's attention on some initiatives that are needed 
to revitalize American manufacturing.
    How much of the 2.7 million job loss is due to the NAFTA agreement? 
NAFTA's detractors state that a significant share of the loss can be 
blamed on the NAFTA agreement and particularly to rising imports from 
Mexico as U.S. jobs have been shifted away from U.S. factories.
    A number of statements indicating how detrimental NAFTA has been 
are based on statistics in ``The High Price of Free Trade,'' a paper 
authored by Robert Scott of the Economic Policy Institute. Scott claims 
that the NAFTA agreement resulted in the loss of 879,280 U.S. jobs, 
disaggregated by state. However, he discounts the pre-2000 period, 
saying that NAFTA's impact was obscured in those years by economic 
growth, and the negative effects of the NAFTA agreement manifested 
themselves after 2000 when jobs began to fall.
    Similarly, the American Manufacturing Trade Action Coalition 
(AMTAC) mission statement says, ``These job losses have been created, 
in large part, by trade deals such as NAFTA . . .'' And a group called 
Save American Manufacturing Now says, ``The current agreements are 
causing the rapid decline in the American economy.''
    I think you will agree, Mr. Chairman, that in order for the NAFTA 
agreement to have been a significant cause of the job loss since 2000, 
imports of manufactured goods from Mexico would have to have grown 
rapidly. In order for ``outsourcing'' or ``offshoring'' or any job 
displacement to have occurred, imports from Mexico would have to have 
grown rapidly. If American manufacturing firms closed their doors and 
moved production to Mexico in order to supply the U.S. market, this 
would have to be reflected in rapidly rising imports from Mexico.
    Now, Mr. Chairman, how much do you think U.S. imports of 
manufactured goods from Mexico have grown since 2000, when the huge 
manufacturing job loss started? From what Robert Scott and others are 
saying, you would probably expect that the growth had been large 
indeed. However, the fact is that they did not grow rapidly. They did 
not grow moderately. They did not even grow slightly. The fact is, they 
fell.
    U.S. imports of manufactured goods from Mexico, following the so-
called ``NAICS'' (North Atlantic Industrial Classification System) 
definition which is used for calculating U.S. production and jobs, were 
$114.5 billion in 2000, and were $113.2 billion in 2003. Since our 
manufactured goods imports from Mexico fell, how could they have been 
responsible for being the principal cause--or even a significant 
cause--of the loss of nearly 3 million manufacturing jobs?
    The answer, Mr. Chairman, is that they were not responsible for our 
job loss. Nor were imports from Canada. U.S. imports of manufactured 
goods from Canada also fell during this time, and total U.S. imports of 
manufactured goods from the NAFTA area fell from $295 billion in 2000 
to $280 billion in 2003. Thus, rising imports from NAFTA did not 
contribute so much as a single nickel to the increased U.S. 
manufactured goods trade deficit nor were they a contributor to the 
U.S. job loss.
    We must look elsewhere for the answer to the question of where the 
jobs went. A good place to start looking, Mr. Chairman, is the $70 
billion collapse of American manufactured goods exports to the world 
since 2000. That figure in itself could account for the loss of close 
to a million jobs.
    Compensation and Productivity--NAFTA's detractors also frequently 
state that NAFTA resulted in a ``race to the bottom'' in worker 
compensation to the detriment of American workers. That, however, is 
not what the U.S. Government's labor statistics show. According to BLS 
data, real hourly compensation (wages and benefits) in U.S. 
manufacturing from 1994-2003 grew 18 percent, more than twice as fast 
as the 7.5 percent they had grown in the ten years prior to NAFTA. 
Claims that NAFTA hurt U.S. compensation growth are unsupported, and 
the only conclusion possible from the actual data is that the effect of 
NAFTA was positive.
    Moreover, U.S. manufacturing productivity (output per hour) grew 65 
percent faster in the 10 years since NAFTA than in the 10 years prior 
to NAFTA. And it is productivity growth that enables real compensation 
increases.
    Was NAFTA the principal factor behind the excellent economic 
performance of U.S. manufacturing during the 1990's? Certainly not. But 
NAFTA cannot be dismissed as irrelevant to this accomplishment. U.S. 
exports were a key driver of the economy, and since 1993 the NAFTA 
countries accounted for as much U.S. export growth as the rest of the 
world combined.

                TRADE DEFICITS WITH THE NAFTA COUNTRIES

    The trade deficit with the NAFTA countries grew rapidly after 1993, 
leading many to conclude that it was the NAFTA agreement that created 
the deficit growth. The deficit with Canada and Mexico widened from $9 
billion in 1993 to $95 billion last year. With Mexico it went from a 
small surplus of $2 billion in 1993 to a deficit of $42 billion last 
year.
    However, this deficit increase took place in the context of a 
worldwide U.S. trade deficit that increased from $115 billion in 1993 
to $535 billion last year. In fact, the growth of the trade deficit 
with the NAFTA countries was not in proportion to the size of U.S. 
trade with NAFTA.
    In 2003, the NAFTA countries accounted for about one-third of U.S. 
global trade (both exports and imports) but for only 18 percent of the 
U.S. global trade deficit. In fact the largest increase in the U.S. 
trade deficit since 1993 was not with the NAFTA countries--it was with 
the European Union, where the U.S. trade deficit worsened by $90 
billion. Critics of trade agreements should take careful note of this 
fact, for no trade agreement was signed with Europe, yet it accounted 
for the largest increase in our deficit with any world region.
    An important reason for the U.S. trade deficit, which will be close 
to $550 billion this year is not the NAFTA agreement or any other trade 
agreement--but is the overvalued U.S. dollar. As the Economic Policy 
Institute, whose report on NAFTA I criticized earlier in my statement, 
notes, ``the overvalued U.S. dollar has been the single greatest 
contributor to the crisis in manufacturing . . . this rise in the 
dollar's value led to an increase of $408 billion in the manufacturing 
trade deficit. . . .'' I think they hit the nail on the head with that 
analysis.
    The principal difficulty with the Economic Policy Institute's 
analysis of the NAFTA deficit is that it appears to assume all of the 
increase in U.S. imports from Canada and Mexico and all of the increase 
in exports to Canada and Mexico resulted only because of the NAFTA 
agreement. In other words, had it not been for the NAFTA agreement, 
imports from Canada and Mexico wouldn't have increased at all. Since 
imports from the world have more than doubled since 1993, I am at a 
loss to explain why someone would believe imports from Canada and 
Mexico wouldn't have grown considerably even in the absence of any 
NAFTA agreement.
    Reasonable people can differ as to how much larger exports and 
imports might be because of the NAFTA agreement, but the Economic 
Policy Institute study makes no such estimate. It just attributes all 
the increase in imports, exports and the trade deficit with Canada and 
Mexico to the NAFTA agreement.
    StronRer Effect on U.S. Exports Than Imports--NAFTA appears to have 
boosted both U.S. exports and imports--that is what one would expect 
from the reduction of trade barriers in a free trade area. However, the 
effect seems to have been stronger on U.S. exports than on imports. 
Since 1993, U.S. exports to NAFTA grew more than twice as fast as U.S. 
exports to the rest of the world. This growth was so rapid that the 
NAFTA countries accounted for about 50 percent of the U.S. export 
increase to the entire world. Think of it--the growth in our exports to 
Canada and Mexico was as large as the growth in our exports to the rest 
of the world combined.
    Imports from the NAFTA countries, on the other hand, grew only 30 
percent faster than imports from the rest of the world. Imports from 
the rest of the world have grown 109 percent since 1993--more than 
doubling in value, while imports from NAFTA countries grew 140 percent. 
Thus, even without the NAFTA agreement, it is reasonable to assume that 
imports from the NAFTA countries would have doubled as well--meaning 
that about 80 percent of the import growth from the NAFTA countries 
would have occurred anyway. If U.S. exports to the NAFTA countries had 
grown at the same rate as the world as a whole, only 50 percent of 
actual U.S. export growth to the NAFTA countries would have been 
accounted for.
    If exports to, and imports from, the NAFTA countries had grown at 
the same rate as exports to, and imports from, the rest of the world, 
the U.S. trade deficit with the NAFTA countries would have been $115 
billion--$20 billion larger than it actually was. Now, there is no 
guarantee that this is what would have happened in the absence of the 
NAFTA agreement, but it is not an unreasonable supposition.
    Small Companies Received Big Benefits--Another criticism frequently 
raised about NAFTA is that the agreement only benefited a few large 
companies. This is absolutely untrue. In 2001 (latest data from the 
Census Bureau), 130,000 U.S. companies exported to the NAFTA 
countries--124,000 of which were small and medium-sized firms. Thus 95 
percent of all U.S. exporters to the NAFTA countries are small and 
medium-sized firms, and they account for about 30 percent of the value 
of all U.S. exports to Canada and Mexico. Moreover, in the last four 
years, the number of U.S. exporters to the NAFTA countries grew by 
17,000 firms--and small and medium-sized firms accounted for all of 
this increase. Thus the trade liberalization resulting from the NAFTA 
agreement has been enjoyed by small companies as well as large. Fully 
95 percent of all the beneficiaries, in fact, were small and medium-
sized U.S. firms.

                               INVESTMENT

    Let me now turn to what is probably the most misunderstood aspect 
of the results of the NAFTA agreement. NAFTA is widely criticized for 
costing U.S. jobs because of a perception that a massive wave of U.S. 
manufacturing investment poured out of the United States and into 
Mexico. As NAFTA got underway, there were dire warnings of a ``great 
sucking sound.'' Robert Scott's recent paper, ``The High Price of Free 
Trade'', says that NAFTA was, ``. . . designed to stimulate foreign 
direct investment and the movement of factories within the hemisphere, 
especially from the United States to Canada and Mexico.''
    This huge outpouring of investment from the United States, though, 
did not occur. There was no ``sucking sound.'' Looking at investment in 
Mexico, for example--in 2002 the total stock of U.S. direct investment 
in manufacturing in Mexico was $19.2 billion, up from $9 billion in 
1993. But during that same time period the total stock of U.S. 
manufacturing investment around the world grew from $192 billion to 
$393 billion.
    Mexico accounted for 4.1 percent of the book value of U.S. direct 
investment in manufacturing abroad in 1983, 4.8 percent in 1993 and 4.9 
percent in 2002. From 1994 to 2000, U.S. manufacturers invested an 
average of $2.4 billion annually in Mexico, an amount that is less than 
1 percent of the $200 billion that manufacturers invest annually in the 
United States. This is hardly a sucking sound. Mexico attracted 
considerably more investment from other countries, as third-country 
producers sought to get inside the NAFTA area and export to the United 
States duty-free. In many cases, this production likely displaced 
earlier exports to the United States directly from third countries.
    Through 2001 (latest data available), U.S. manufacturing affiliate 
employment in Mexico had grown by 271,000 since 1993. Over 40 percent 
of that--113,000 jobs--was in the automobile industry. Note that during 
that time, the U.S. auto industry created 236,000 new jobs in the 
United States--two U.S. jobs for every one created in Mexico.
    The rest of the job growth in U.S. manufacturing affiliates in 
Mexico, an increase of 158,000, works out to 20,000 jobs a year. These 
jobs in Mexico reflected the stronger North American economy that 
resulted after the NAFTA agreement, and were accompanied by the far 
more rapid growth of manufacturing jobs created in the United States 
since 1993--a total of 489,000 new U.S. manufacturing jobs. Some of 
those jobs, it should be pointed out, were created to meet the added 
U.S. production needs resulting from the rapid expansion of U.S. 
exports to Mexico. Additionally, it is important to note that U.S. 
affiliate employment in Mexico fell after 2000, further evidence that 
NAFTA has not been a major factor in the U.S. job loss.
    The situation in Canada shows even less job expansion by U.S. 
manufacturing affiliates. Employment by Canadian affiliates of U.S. 
manufacturing firms grew from 403,000 in 1993 to 460,000 in 2001--an 
increase of 57,000. Similar to the situation in Mexico, employment in 
U.S. manufacturing affiliates in Canada fell after 2000.

                             NAFTA: A PLUS

    Thus, Mr. Chairman, it is clear that the NAFTA agreement did not 
result in any huge loss of U.S. jobs. What NAFTA did was to remove 
barriers to trade in North America and allow the expansion of trade and 
commercial activities among the three countries. Trade increased, and 
along with it the opportunities for greater production specialization 
and rationalization.
    It is difficult to look at the 1993-2000 period and conclude 
anything other than that NAFTA contributed to economic growth and to 
the growth of the U.S. manufacturing industry. It is also difficult to 
look at the 2000-2003 period and conclude that the NAFTA agreement was 
a contributing factor in the decline in U.S. manufacturing employment, 
since manufactured goods imports into the United States from both 
Canada and Mexico fell after 2000.
    While it is true that the U.S. trade deficit with the NAFTA 
countries increased after 2000, this was entirely due to a significant 
drop in U.S. exports to the two countries. U.S. exports to the NAFTA 
countries fell $21 billion from 2000 to 2003, which more than accounted 
for the $18 billion increase in the U.S. trade deficit with Canada and 
Mexico during that time.
    In part this reflects the increased integration of the North 
American economy--when demand in the U.S. economy falters, the effects 
spread to Canada and Mexico and reduce demand in their economies, 
including their demand for imports from the United States. The decline 
may also reflect the overvaluation of the dollar that took place during 
that time, a factor which led to the fall in U.S. exports globally.

                      IMPLICATIONS FOR THE FUTURE

    Mr. Chairman, I believe that the NAFTA agreement, which has helped 
create a stronger and more integrated North American industry, will 
continue to enable the rationalization of production and contribute to 
the future increase in productivity that we must have in order to be 
able to compete in the world. NAFTA helped level the playing field for 
American manufacturers, and we need to see more leveling in the 
future--for we face a lot of trade barriers around the world.
    But in answering the question of how to restore American 
manufacturing jobs, we have to recognize that the two biggest factors 
have been the drop in domestic demand for manufactured goods--largely 
in capital goods; and in the $70 billion drop in our exports of 
manufactured goods globally. The export drop is largely a function of 
the excessively high value of the dollar, which peaked in 2002 at a 
level 30 percent above normal levels. The dollar has since been moving 
back toward a more normal level--at least vis-a-vis currencies whose 
values are allowed to be set by the marketplace. This beneficial 
movement is already beginning to be reflected in an export turn-around, 
and I expect our exports to grow robustly this year and next--enough to 
begin a significant decline in our trade deficit.
    Additionally, however, we must address the domestic factors that 
are making the United States a more expensive place in which to 
produce. The NAM, together with the Manufacturers Alliance, has found 
that the higher costs of taxation, regulation, litigation, medical 
care, and other factors on average put U.S. producers at a 22 percent 
production disadvantage relative to their competitors. We must address 
this as well as taking the steps necessary to assure a continuation of 
sound macro-economic growth.
    The NAM looks forward to working with this subcommittee and the 
rest of the Congress in taking the steps necessary to revitalize 
American manufacturing and enable it to continue its vital role in the 
U.S. economy. Last month the NAM Board of Directors approved a 
resolution that sets out the path we believe must be followed, 
including taking steps to:

   Promote and encourage economic growth as the single most 
        important fundamental to promoting the nation's interests and 
        improving the standard of living for the American people;

   Reduce the cost of producing in the United States by 
        containing health care costs, reducing taxes on business, 
        enacting legal reforms, ensuring adequate and affordable energy 
        supplies and reforming the regulatory process to more 
        effectively assess costs and benefits and the impact on 
        industry land employment;

   Level the international playing field by ensuring that 
        foreign countries, particularly China and other major trading 
        partners, reduce trade barriers, comply with international 
        trade rules and allow markets to determine exchange rates;

   Promote innovation investment and productivity through tax 
        reforms that encourage investment and R&D, domestic and 
        international tax rules that keep U.S. manufacturers 
        competitive and promote pro-growth investment, and strengthened 
        government R&D programs; and

   Ensure an adequate supply of skilled workers through greater 
        emphasis on quality education, including math, science, and 
        engineering; strengthened implementation of the Workforce 
        Investment Act; expanded business-government partnerships; and 
        a redirecting of federal programs to better assist displaced 
        workers.

    Thank you, Mr. Chairman.

    Senator Hagel. Mr. Vargo, thank you.
    Dr. Bergsten.

  STATEMENT OF DR. C. FRED BERGSTEN, DIRECTOR, INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Dr. Bergsten. Mr. Chairman, as you know, I'm substituting 
today for my colleague, Gary Hufbauer, who had a serious family 
illness. Just to mention, he and my other colleague, Jeffrey 
Schott, are completing a 10-year evaluation of NAFTA. We look 
forward to sharing that with the committee. The statement from 
Dr. Hufbauer that I've submitted today gives you some initial 
results on that.
    In my oral remarks, I'd like to make three brief comments. 
First, the main impact of NAFTA on the United States, of 
course, occurs via Mexico. The United States and Canada already 
had a free trade agreement. Trade with Mexico is a very small 
share of the U.S. economy, whatever the aggregate numbers. The 
smaller country in a trade agreement is always, by far, the 
most affected. So in asking what has been the impact of NAFTA 
on the United States, we really have to rephrase the question 
and ask, what has been its impact on Mexico?
    As you suggested a moment ago in a question to the former 
panel, a strong Mexico, in both economic and political terms, 
is obviously very much in the U.S. interest. And I want to 
submit that NAFTA has had a powerful and dramatically positive 
effect on Mexico, in both economic and political terms, and 
therefore on the United States.
    In economic terms, the impact of NAFTA on Mexico is 
unambiguously positive. When I started working on Mexico, 30 or 
40 years ago--even 20 years ago, in 1980--Mexico was one of the 
most closed economies in the world. The share of trade in the 
Mexican economy as recently as 1980 was minuscule. When you 
added up exports and imports, compared it with Mexico's GDP, 
the number was 8 percent as recently as 1980. Last year, it was 
over 25 percent. In short, Mexico has tripled its openness to 
the world economy over a very short period of time, less than 
25 years.
    That is critically important because every analysis of 
development ever done shows a powerful correlation between the 
increasing international integration of an economy and its 
economic success. Indeed, it remains true that no country has 
ever achieved sustainable development without having integrated 
in the world economy--that is, globalized. Indeed, the faster 
you globalize, the better you do.
    A recent study from the World Bank compared the globalizing 
and non-globalizing developing countries based on changes in 
their share of trade to their economy. The globalizers had 
shown dramatic growth, averaging 6 or 7 percent a year and had 
actually cut the gap with the rich countries. The non-
globalizers--and, unfortunately, this includes a lot of small 
African countries--had shown an absolute deterioration in their 
per-capita incomes and had lost ground not only to the rich 
countries, but also to the globalizing developing countries.
    Mexico is one of the most powerful cases of how openness 
has correlated with economic progress. Indeed, in many senses 
Mexico has become a poster child of globalization. We know that 
the Mexican Government, in first contemplating and then 
enacting NAFTA, used the agreement to achieve sweeping reforms 
of its domestic economy as well as its international economic 
policy. The succeeding governments in Mexico used NAFTA to lock 
in the liberalizing reforms, and today there is no question of 
whether Mexico will continue with the opening policies of the 
past, in large part because of NAFTA and the lock-in effect. 
So, in economic terms, it is absolutely unambiguous and a huge 
gain to Mexico.
    When I say this, I don't mean to suggest that every last 
individual Mexican has gained from NAFTA. Like with any dynamic 
economic change, there are costs and there are losers; 
therefore, we cannot simply assume that every Mexican has 
gained, because many demonstrably have not. But when you look 
at the different income groups in Mexico, the different 
regional groups, you find that all have gained; some less than 
others, but they all have benefited as a result. And so most 
people, even the poorest in Mexico have been beneficiaries of 
NAFTA. I think the outcome from that is very clear.
    Second, what about the politics? Even more important than 
these economic gains--but, I think, undoubtedly related to 
them--have been the dramatic changes in the Mexican political 
situation. They had their first honest election ever in 2000. 
They had a peaceful transition from the PRI to the opposition. 
These are the true tests of democracy: honest elections, 
peaceful transitions. We can be very proud of this dramatic 
change on our southern border and we can feel confident that it 
has been due, at least in part, to the economic opening and 
liberalization on that count which inexorably leads to an 
opening on the political and social sides as well.
    Third, what about the direct effects of NAFTA on the United 
States? It has to be favorable. Think back to when we 
negotiated NAFTA. The United States had an average tariff 
against Mexican products of about 2 percent, and we got rid of 
it. We had very few other barriers to get rid of. Mexico had an 
average tariff against the United States of about 12 percent 
and a lot of non-tariff barriers, virtually all of which 
they've gotten rid of. In short, it's a no-brainer. We got a 
six-to-one benefit in terms of changes on the tariffs and an 
even bigger ratio of benefits on the non-tariff barriers so we 
had to gain.
    Indeed, Mexico was the first case, and a kind of prototype, 
of the asymmetrical trade liberalization strategy that the 
United States has been pursuing with all the major developing 
countries--be it Brazil, through an FTAA; be it China, as it 
entered the WTO; be it the various countries with which we are 
now negotiating at the global, regional, or bilateral level. 
They all have much higher barriers than we do. So we obviously 
gain by an agreement that reduces, and preferably eliminates, 
barriers on both sides. Indeed, the United States can gain only 
by getting as close as possible to global free trade, by 
reducing the much larger barriers in the other countries than 
the very low barriers that we started out with and which we 
reduce as the quid pro quo. And Mexico, again, was the first 
case in point; there's no doubt, as I'll indicate in a minute, 
what the benefits of that have been.
    It seems to me if we want to ask, ``What have been the net 
effects of all this on the U.S. economy,'' we have to look at 
the aggregate performance of our economy over the last 10 
years. With the admitted blip of the mild 2001 recession, and 
the admitted disappointments of the slow pickup in job growth 
in 2002-2003, the U.S. economic performance over the last 
decade has been dramatic. Our economic growth in the second 
half of the 1990s averaged close to 5 percent. We're now back 
to 5 percent growth. My own forecast, for what it's worth, is 
that we've probably got another decade of very rapid growth in 
front of us. The reason is simple: our productivity growth, 
depending on how you define it, has doubled or tripled since 
the mid-1990s from what it was in the previous 25 years.
    It's very hard to quantify the impact on that productivity 
pickup of globalization, trade liberalization and the like, but 
studies at our Institute for International Economics suggest 
that as much as one half of the total improvement in U.S. 
productivity growth, which underlies our overall economic 
spurt, is due to globalization. This is because of the 
pressures that it brings to bear on our economy and the greater 
competitive impetus that it gives to improved economic 
performance by American firms and workers.
    This increases the adjustment pressures and the adjustment 
costsas well and that's why we need better safety nets, better 
TAA programs, as Senator Coleman and you have both advanced, 
and that's why we need to pay more attention to the costs and 
losers. But, again, the net effect on our economy is 
unambiguously positive, and that's why we were able to reduce 
unemployment below 4 percent for several years in the late 
1990s without igniting inflationary pressures, an unprecedented 
level that no economist, myself included, would have thought 
possible 10 years ago.
    We've tried to quantify the impact of NAFTA alone and Dr. 
Hufbauer mentions it in his statement. Something like three-
tenths of a percentage point a year of U.S. economic growth can 
be directly attributed to the improved productivity, lower 
costs, and competitive pressures that arise from that component 
of our overall trade policy. I wouldn't put huge weight on any 
specific number but the point is that NAFTA--as one of the key 
elements of our overall trade strategy--which, in turn, has led 
the U.S. economy to triple its reliance on world markets over 
the last 40 years has been part and parcel of this dramatic 
improvement in productivity growth, job-creating potential and 
overall performance of our own economy.
    The result of that increase in U.S. globalization has been 
a huge increase in U.S. job creation all through the 1990s and, 
again, a very sharp increase in our income levels--another 
clear economic benefits to the United States.
    So whether we want to look at it through the Mexican lens, 
whether we want to look at it more directly through our own 
economy and the effects of globalization, including NAFTA, I 
think the verdict on ``NAFTA at ten'' is unambiguously 
positive.
    Thank you.
    [The prepared statement of Dr. Hufbauer follows:]

                Prepared Statement of Dr. Gary Hufbauer

    Mr. Chairman, thank you for inviting me to testify at this 
important hearing. Globalization has become a lightening rod for 
multiple discontents, and NAFTA is the very tip of the lightening rod. 
NAFTA thus attracts a great deal of misguided criticism. ``Failed 
NAFTA'' has entered the lexicon of political sound bites.
    ``Successful NAFTA'' would be more accurate. Is Mexico first among 
its peers in the ranks of emerging countries? Certainly no. But is 
Mexico better off because of NAFTA? Certainly yes. Has NAFTA 
contributed to U.S. economic growth? Certainly yes. The central purpose 
of NAFTA was to promote the economic integration of North America. It 
was not intended to redesign Mexican, Canadian or American 
institutions. It was not an all-purpose treaty to address macroeconomic 
policy, financial surveillance, infrastructure, migration, drug 
trafficking and corruption. NAFTA has succeeded brilliantly in 
promoting trade and investment. Looking to the future, the North 
American partners can build on NAFTA's successes to make progress on 
new issues.
    Trade record. NAFTA contributed to a sharp expansion of regional 
trade in the 1990s. Since 1993, the year before NAFTA came into force, 
U.S. merchandise exports to Mexico have increased by 134 percent and 
imports have increased by 246 percent. Total two-way U.S.-Mexico 
merchandise trade has grown 189 percent; during the same period, U.S. 
non-NAFTA two-way trade increased only 92 percent. Before NAFTA was 
launched, U.S.-Canadian trade integration was already very deep (thanks 
to the 1965 Auto Pact, and the 1989 Canada/U.S. Free Trade Agreement). 
Since 1993, when NAFTA was ratified, U.S.-Canadian two-way merchandise 
trade has increased by 87 percent, slightly slower than U.S. non-NAFTA 
trade. As a result of faster trade growth within North America, 
merchandise trade with NAFTA partners accounted for 32 percent of total 
U.S. merchandise trade in 2003, up from 29 percent in 1993.\1\
---------------------------------------------------------------------------
    \1\ U.S. International Trade Commission. Tariff and Trade Dataweb. 
http://dataweb.usitc.gov (last accessed April 13, 2004).
---------------------------------------------------------------------------
    The NAFTA effect is less obvious in services, and perhaps missing. 
Between 1993 and 2003, U.S. cross-border services trade was up 69 
percent with Canada and 51 percent with Mexico (2002 figure, the latest 
year available). Both figures are lower than the rise in U.S. two-way 
services trade with non-NAFTA countries, up 82 percent.\2\
---------------------------------------------------------------------------
    \2\ Bureau of Economic Analysis. U.S. International Accounts. 
http://www.bea.gov/bea/di1.htm (last accessed April 13, 2004).
---------------------------------------------------------------------------
    Investment record. While the United States has not heard a ``giant 
sucking sound'', U.S. foreign direct investment (FDI) in Canada and 
Mexico has been strong. At historical cost, the U.S. investment 
position in Mexico was $58 billion at yearend 2002, up from $17 billion 
in 1994. Other countries have likewise increased their investment in 
Mexico; total inward FDI stock was $154 billion in 2002, up from $41 
billion in 1994. U.S. investment growth in Canada has been slower, but 
began from a much larger base. The U.S. investment position in Canada 
rose to $153 billion in 2002, up from $74 billion in 1994.\3\
---------------------------------------------------------------------------
    \3\ Bureau of Economic Analysis. U.S. Direct Investment Abroad: 
Balance of Payments and Direct Investment Position Data. http://
www.bea.gov/bea/di/di1usbal.htm (last accessed March 26, 2004), and 
Organization of Economic Cooperation and Development. OECD Direct 
Investment Statistics, 2003. http://www.oecd.org/dataoecd/62/26/
2635829.xls (last accessed April 13, 2004).
---------------------------------------------------------------------------
    Jobs gained and lost. To most economists, the debate over NAFTA and 
jobs is surreal. Trade pacts make little if any difference to the 
overall level of employment. They do affect the composition and quality 
of jobs by shifting output from less productive sectors into more 
productive ones. This process contributes to the normal churning of job 
destruction and creation in the huge U.S. economy. Between 1994 and 
2002 (when NAFTA-TAA was subsumed into the larger TAA program), NAFTA-
TAA certified approximately 525,000 workers who lost their jobs on 
account of all trade and investment with Mexico and Canada (not just 
NAFTA-induced commerce). This works out to roughly 58,000 displaced 
workers per year.\4\ Considering that U.S. employment is over 135 
million, and that, on average, 7.6 percent of workers (10.5 million 
jobs at the most recent employment level) change their jobs every 
quarter, the loss of 58,000 jobs per year seems fairly small.\5\ 
Nonetheless, U.S. public policy could do far more--through wage 
insurance, retraining, and job placement--to assist dislocated workers, 
whether the cause is NAFTA, globalization more generally, or simply 
fast productivity growth.
---------------------------------------------------------------------------
    \4\ This number has elements of overstatement, because workers need 
only show that that their job was affected, not caused, by trade with 
Canada and Mexico. It also has elements of understatement, because not 
all NAFTA-affected workers apply for the benefit.
    \5\ Bureau of Labor Statistics, Business Employment Dynamics, 
http://www.bls.gov/bdm (last accessed March 12, 2004).
---------------------------------------------------------------------------
    Even though the NAFTA-TAA figure probably exaggerates the adverse 
impact of NAFTA, no comparable figure is available on U.S. jobs created 
owing to larger exports to Canada and Mexico. Using 1999 data, the 
Departments of Commerce and Agriculture estimated that about 12,000 
jobs are supported by every billion dollars of U.S. exports.\6\ This 
coefficient seems high, and a more conservative for 2001 would be 8,500 
jobs per billion dollars of manufactured exports.\7\ Applying this 
coefficient to the average annual gain in U.S. exports to NAFTA 
countries between 1993 and 2003, about $12.5 billion per year, over 
100,000 additional U.S. jobs have been supported each year by the 
expansion of North American trade.
---------------------------------------------------------------------------
    \6\ See United States Trade Representative, United States Exports, 
http://www.ustr.gov/outreach/states/us.pdf (last accessed April 13, 
2004).
    \7\ In 2001, the manufacturing sector employed 15.9 million 
employees while manufacturing value added was $1,853 billion (U.S. 
Census Bureau, Statistical Abstract of the United States: 2003 (123rd 
edition), Washington: US Government Printing Office, table 987). This 
calculation assumes that $1 billion of exports equates to $1 billion of 
manufacturing value added (taking into account shipments of components 
between manufacturing firms). This method, in contrast to the Commerce 
and Agriculture method, ignores labor employed in non-manufacturing 
sectors that supply inputs to the manufacturing sector.
---------------------------------------------------------------------------
    Economic gains. But the economic contribution of NAFTA should not 
be measured in terms of jobs gained and lost, but rather in terms of 
the higher productivity of the U.S. export sector and efficiency gains 
to the overall economy. On average, U.S. export jobs pay 13 to 16 
percent more than average jobs in the U.S. economy.\8\ Moreover, the 
growing intensity of U.S. merchandise trade with Canada and Mexico, up 
from 4.4 percent of U.S. GDP to 5.7 percent between 1993 and 2003, can 
be attributed with $29 billion of GDP gains to the U.S. economy each 
year.\9\
---------------------------------------------------------------------------
    \8\ United States Trade Representative, op cit.
    \9\ See OECD, The Sources of Economic Growth in OECD Countries, 
Paris: March 2003.
---------------------------------------------------------------------------
    The automotive industry exemplifies NAFTA efficiency. Auto trade 
accounts for a fifth of all merchandise trade among NAFTA partners. 
Supply lines now routinely cross national boundaries, as each country 
pursues specializations based on to its comparative advantage and all 
benefit from the larger scale of the NAFTA market. While the Big Three 
(GM, Ford, and DaimlerChrysler) were the first to benefit from NAFTA, 
foreign auto producers are now investing in all three countries. Other 
industries will follow the auto industry, provided that borders remain 
reliably open.
    Border security. In the wake of 9/11, the United States negotiated 
``Smart Borders'' with Canada and the ``Border Partnership Action 
Plan'' with Mexico. These initiatives are designed both to improve 
security and minimize delays. The basic structure of border inspections 
remains in place however, and it was designed to collect tariffs and 
detect smuggling, not combat terrorism. More must be done to plan for 
the eventuality of an attack--rather than betting North American 
integration on 100 percent effective defense. We need a new system of 
security management: inspections where trucks and trains are loaded 
rather than at the border should be at the core. This would relieve 
inspectors at the borders from monitoring the growing volume of routine 
and legitimate trade. Moreover, it would mean that most trucks and 
trains could still move in the aftermath of an attack from other 
quarters.
    Challenges ahead. NAFTA has visibly succeeded in its central 
goals--boosting trade and investment, thereby integrating the economies 
of North America. But much more can be done. Since 1996, NAFTA has been 
on autopilot, relying on the inspiration of its creators, rather than 
initiatives from their successors. The list of possible new initiatives 
is long. Rather than dither over exactly the right menu, the next 
administration in Washington, in consultation with Mexico City and 
Ottawa, should chose a good menu, and get started. Here are a few 
ideas.

   Migration. This is a thorny topic, but it is high on 
        Mexico's agenda. Congress ought to consider President Bush's 
        proposals. The United States and Mexico need to cooperate in 
        regulating the northward flow of Mexican workers, and the 
        United States needs to ensure minimum rights for all 
        immigrants.

   Energy. The United States and Canada should agree on natural 
        gas pipeline routes and the nature and extent of public 
        subsidies. Mexico needs to welcome private investment 
        throughout its energy sector. LNG terminals in the Gulf of 
        California would be a good place to start.

   Financial surveillance. All three countries should agree on 
        minimum standards for supervision and surveillance of banks, 
        insurance companies, mutual funds, mortgage-backed securities, 
        and stock exchanges. The goal should be financial integration 
        within a decade.

   Agriculture. Within a decade, NAFTA promises free trade 
        between the United States and Mexico in agricultural products. 
        Canada should join the party.

    Senator Hagel. Dr. Bergsten, thank you.
    Ms. Lee.

 STATEMENT OF THEA M. LEE, CHIEF INTERNATIONAL ECONOMIST, AFL-
                              CIO

    Ms. Lee. Thank you very much, Mr. Chairman.
    I very much appreciate the opportunity to testify today on 
behalf of the 13 million working men and women of the AFL-CIO. 
I appreciate the invitation to talk about an issue that's so 
important to our members.
    I think it won't surprise anybody that I have a different 
perspective on this issue than the one that has been presented 
so far today. When our members look at NAFTA, we see a lot of 
disappointments and a lot of areas in which it's fallen short.
    It was sold to the American public and to American workers 
as a market-opening agreement that would create high-paying 
export-related jobs here in the United States, bring prosperity 
to Mexico, and spur economic growth and political stability 
throughout North America. But, in our view, the outcome has 
been quite different.
    Certainly we don't dispute that trade and investment flows 
between the three countries have grown very dramatically during 
the decade since NAFTA was put into place. I guess what I'd 
like to do today is put my focus, not so much on whether total 
trade has grown, or even whether investment flows have grown 
since NAFTA was put into place, but on a few other things. 
First is the trade deficit that the United States has had with 
Mexico and Canada and second what the distributional impact has 
been, especially the impact on workers in all three countries. 
I'd also like to take a look at some of the particular rules in 
NAFTA that, in our opinion, have been problematic and shouldn't 
be replicated in future trade agreements.
    One of the things we've seen in the decade since NAFTA has 
been put in place is that workers in the three countries have 
seen their wages either fall or stagnate. The key issue for us 
is the gap between the growth in productivity in all three 
countries and the growth in wages: wages have not kept up with 
productivity increases. This, to us, is troubling, and it goes 
to the heart of what NAFTA is about: shifting the balance of 
bargaining power within the continent from workers in all three 
countries to multinational corporations.
    Advocates of NAFTA promised better access to a market of 90 
million consumers on our southern border, and prosperity for 
Mexico, which was to yield the win-win outcome. But 10 years 
later, our combined trade deficit with Mexico and Canada has 
ballooned from $9 billion to $95 billion. And I want to 
emphasize this point because I think it's important. If we go 
back to the prediction that was made before NAFTA by IIE, which 
was one of the most often-cited predictions used by both the 
Clinton administration and the previous Bush administration, we 
remember that IIE predicted that NAFTA would create 200,000 
jobs. This was based on a prediction that the United States 
would run a trade surplus with Mexico of between $7 billion to 
$9 billion for the next 15 years or so, and that that would 
create 200,000 jobs.
    Now, the Economic Policy Institute study that Frank Vargo 
mentioned actually uses pretty much the same methodology, the 
same yardstick: EPI calculates the change in net exports and 
then attaches a job multiplier to that. And on the basis of 
that, the trade-related job losses come out at around 879,000 
jobs. I disagree with Frank that this is not a relevant way of 
looking at this issue. We're looking at the trade balance 
between the countries and what the overall net change has been 
in the 10-years since this agreement was put into place. It's 
very different from the outcome that was predicted.
    I'd also like to address a point that Dr. Bergsten made, 
that NAFTA was a no-brainer or a slam-dunk because Mexico's 
tariffs were so much higher than U.S. tariffs. That was the 
basis for the prediction that the United States would have an 
increase in net exports with Mexico, and yet it didn't work out 
that way. This is just a puzzle that certainly the U.S. Trade 
Representative needs to address, that if the idea of these free 
trade agreements is supposed to be to increase net exports to 
gain better access to other markets, it's not working. It 
didn't work in NAFTA, and, in fact, in all the free trade 
agreements that the United States has ever signed--with Israel, 
Canada, Mexico, and Jordan--we've seen a deterioration in our 
trade balance after the agreement was signed, not an 
improvement.
    Another point that I think is extremely important has to do 
with the bargaining-power question. Professor Kate 
Bronfenbrenner, at Cornell University, has done some research 
and has found that since NAFTA was put into place employers 
have increasingly used the threat of shifting production to 
stifle union-organizing drives or to block first contracts. The 
prevalence of these threats rose from 29 percent in 1986-1987 
to 51 percent in 1998-1999. And, of course, if you look only in 
mobile industries, like manufacturing, that threat increases to 
71 percent. So you see, increasingly, employers are using a 
threat of shifting production as a way of busting unions or 
blocking first contracts.
    I want to emphasize this point, because I think it goes a 
long way to explaining some of the difference in views between 
workers and business on the issue of whether NAFTA has been 
good or bad. To the extent that NAFTA makes the threat of 
moving production more credible and it helps employers use that 
threat more effectively, I think it's certainly something that 
is going to be perceived negatively by American workers. These 
threats are illegal under U.S. labor law. It's illegal to 
threaten to shut a factory down in order to block a union-
organizing drive, and yet it happens all the time, and the laws 
are not enforced.
    But if American workers are going to increasingly face 
these illegal threats when they try to exercise their right to 
form a union or to bargain a decent contract, I think they will 
continue to view the trade agreements that facilitate these 
threats with suspicion and hostility.
    There's been a lot of discussion about Mexico and whether 
there have been huge advantages to NAFTA for Mexico. I would 
argue that on this front NAFTA has also fallen short in looking 
at a couple of key statistics. Real wages in Mexico are 
actually 7 percent lower today than before NAFTA was put in 
place. I think that's a striking finding, that no matter how 
much economic growth, no matter how much trade liberalization, 
no matter how much investment went into Mexico, the average 
worker in Mexico has not benefited. And that's 10 years later, 
with tremendous productivity growth, tremendous economic 
growth. Why is it that the workers have not gotten their fair 
share of the wealth that they create?
    The number of people in poverty has apparently grown from 
62 million to 69 million. The number of people crossing the 
border illegally is estimated to have doubled, contrary to the 
predictions of some of the NAFTA boosters, including then-
President Salinas. And there's one more figure, which is 
somewhat contradictory to the one that Dr. Bergsten raised. 
According to the Carnegie Endowment study, the top 10 percent 
of households in Mexico increased their share of national 
incomes since NAFTA, while the other 90 percent lost income or 
saw no change. I think those are fairly troubling numbers and 
really go to the heart of whether NAFTA has been a big boon for 
Mexico. It's obviously not been popular among Mexican farmers. 
It's not popular among Mexican unions or workers either.
    Finally, in terms of the NAFTA model, the NAFTA Chapter 11 
provisions on investment have been deservedly controversial. 
There was a front-page article in the New York Times this 
Sunday that highlighted some of the challenges to U.S. court 
cases under NAFTA. We've also been very concerned to see 
corporations using the power to sue governments under NAFTA 
Chapter 11 to challenge environmental and public-health laws 
that we think are legitimate and certainly are put in place 
democratically.
    We're concerned about the restrictions under NAFTA on the 
ability of governments to regulate services that are delivered 
across borders and by foreign investors. We have a lot of 
concerns about the government procurement provisions in NAFTA 
that have very narrow criteria attached to them.
    One of the key issues has been whether workers' rights or 
human rights considerations can be a factor in a government 
procurement decision. In 1999, when President Clinton put into 
place an Executive order to stop government purchases of goods 
made by the worst forms of child labor--that is child slavery, 
hazardous work, and child prostitution and pornography--the 
U.S. Government had to exclude Canada and Mexico from that 
order because that would have potentially violated our NAFTA 
government procurement obligations.
    That seems, to us, the wrong kind of obligations to be 
making, that we are not allowed to say the Federal Government 
shouldn't buy goods made with child slavery. We shouldn't be 
putting provisions into our trade agreements that prevent us 
from making that commitment.
    And, finally, the NAFTA Labor Side Agreement has utterly 
failed to protect workers' rights. None of the 28 cases filed 
under the Side Agreement has progressed beyond the initial 
stage of cooperative consultations, and no labor rights 
violators have faced any penalties whatsoever under the accord. 
A recent UCLA study of the Labor Side Agreement found, ``Its 
inherent weakness and a lack of political will among the 
parties to implement it may doom the accord to oblivion.''
    And the last point I want to make has to do with whether 
NAFTA has improved overall U.S. competitiveness. Certainly, 
Under Secretary Aldonas and Secretary Wayne both mentioned this 
as one of the key advantages of NAFTA. Again, if you look just 
at the trade figures, our overall trade deficit has ballooned 
from $75 billion in 1993 to $489 billion in 2003. To me, that 
doesn't look like an economy which is doing a good job 
competing with the rest of the world.
    Frank Vargo mentioned the declining U.S. exports, which 
we're very concerned about, as well, but I think part of the 
issue has to be purchasing power in some of the countries with 
whom we trade, and whether we are, in fact, doing a good job 
distributing the benefits of the trade agreements.
    So let me just conclude by saying that the AFL-CIO is not 
opposed to the concept of international trade and investment, 
in principle, but we do believe that trade agreements must 
include enforceable protections for workers' rights, must 
preserve our ability to use our domestic trade laws 
effectively, protect the government's ability to regulate in 
the public interest, use procurement dollars to promote 
economic development and other legitimate social goals, and to 
provide high-quality public services. And we do want to see 
workers, their unions, and other civil-society organizations 
able to participate meaningfully in our government's trade 
policy process on an equal footing with corporate interests.
    We believe our government should be negotiating trade 
agreements that appropriately address all the social, economic, 
and political dimensions of trade and investment, not just 
those of concerned to corporations. But, unfortunately, in our 
view NAFTA is precisely the wrong starting point to achieve 
that.
    I thank you very much for your attention. I look forward to 
any questions you might have.
    [The prepared statement of Ms. Lee follows:]

                   Prepared Statement of Thea M. Lee

    The North American Free Trade Agreement (NAFTA) was sold to the 
American public and American workers as a market-opening agreement that 
would create high-paying export-related jobs here in the United States, 
bring prosperity to Mexico, and spur economic growth and political 
stability throughout North America. The outcome has been quite 
different.
    While it is true that trade and investment flows between the three 
North American countries have grown rapidly since NAFTA was implemented 
in 1994, on measures of much more importance to the average North 
American citizen, NAFTA has been a dismal failure. Workers in all three 
NAFTA countries have seen their wages fall or stagnate (failing to keep 
pace with productivity increases), as job insecurity and inequality 
have grown. At the same time, NAFTA rules have disadvantaged North 
American family farmers, consumers, and the environment relative to 
multinational corporate interests.
    Rather than encouraging sustainable and equitable growth, NAFTA has 
contributed to the loss of jobs and incomes of workers, while enriching 
the very few. NAFTA's main outcome has been to strengthen the clout and 
bargaining power of multinational corporations, to limit the scope of 
governments to regulate in the public interest, and to force workers 
into more direct competition with each other, while assuring them fewer 
rights and protections. The increased capital mobility afforded by 
NAFTA has hurt workers, the environment, and communities in all three 
NAFTA countries.

                         LOSS OF AMERICAN JOBS

    Advocates of NAFTA promised better access to a market of 90 million 
consumers on our southern border and prosperity for Mexico, yielding a 
``win-win'' outcome. Yet in ten years of NAFTA, our combined trade 
deficit with Mexico and Canada has ballooned from $9 billion to $95 
billion. The Labor Department has certified that more than half a 
million U.S. workers have lost their jobs due to NAFTA, while the 
Economic Policy Institute puts the trade-related job losses at almost 
900,000.
    Even workers who have kept their jobs have seen wages, benefits, 
and bargaining power eroded under NAFTA. Professor Kate Bronfenbrenner 
at Cornell University found that since NAFTA was put in place, 
employers have increasingly used the threat of shifting production to 
stifle union organizing drives or to block first contracts.

                          BENEFITS FOR MEXICO?

    One of the main advantages of NAFTA was supposed to be that it 
would alleviate poverty and low wages in Mexico, helping bring the U.S. 
and Mexico closer together. However, on this front also, it has fallen 
short. Real wages in Mexico are actually 7 percent lower today than 
before NAFTA was put in place, and the number of people in poverty has 
grown from 62 million to 69 million.\1\ The number of people crossing 
the border illegally is estimated to have doubled, contrary to 
predictions of NAFTA boosters, including then-President Salinas.
---------------------------------------------------------------------------
    \1\ John J. Audley, Demetrios G. Papademetriou, Sandra Polaski, and 
Scott Vaughan, ``NAFTA's Promise and Reality,'' CEIP, 2004.
---------------------------------------------------------------------------
    Furthermore, Mexico now faces difficult transitions in its farm 
sector, as the last round of NAFTA's agricultural tariffs are phased 
out. And the rapid maquiladora employment growth of the 1990s is fading 
fast, as multinational corporations shift more production to China and 
other low-wage locations, where workers' rights are severely repressed. 
These are the logical consequences of a free trade agreement that 
relied solely on lowering trade barriers and protecting corporate 
interests, but failed to build an adequate social dimension.

                            THE NAFTA MODEL

    NAFTA undermines our laws by allowing corporations to sue 
governments and challenge statutes protecting the environment, public 
health and consumers. In some cases, corporations have even collected 
compensation from governments for lost profits or other damages. 
Legislators and ordinary citizens have no effective voice in the 
dispute resolution process, even though it is the laws they have voted 
for that are under attack.
    NAFTA restricts the ability of governments to regulate services 
delivered across borders and by foreign investors. Under NAFTA, we have 
had to open the border to Mexican trucks even though we cannot ensure 
that each of these trucks meets our health and safety standards. Public 
services have been threatened as well--a case against Canada's postal 
service under NAFTA is still under way, and has disturbing implications 
for our governments' ability to regulate and support other essential 
public services.
    NAFTA doesn't allow governments in Canada, Mexico and the U.S. to 
include local preferences or workers' rights criteria in making 
purchasing decisions. In fact when, the U.S. government decided to stop 
procuring goods made with the worst forms of child labor in 1999, it 
had to exclude Canada and Mexico from the order.
    Finally, the NAFTA labor side agreement has utterly failed to 
protect workers' rights. None of the 28 cases filed under the side 
agreement has progressed beyond the initial stage of cooperative 
consultations, and no labor rights violators have had to face any 
penalties under the accord. A recent UCLA study of the labor side 
agreement found that its inherent weaknesses, and a lack of political 
will among the parties to implement it aggressively, may doom the 
accord to ``oblivion.'' \2\
---------------------------------------------------------------------------
    \2\ Linda Delp, Marisol Arriaga, Guadalupe Palma, Haydee Urita, and 
Abel Valenzuela, ``NAFTA's Labor Side Agreement: Fading into 
Oblivion?'' University of California at Los Angeles, March 2004.
---------------------------------------------------------------------------
           NAFTA IN THE CONTEXT OF BROADER U.S. TRADE POLICY

    One often-cited argument for NAFTA was that it would improve U.S. 
competitiveness with the rest of the world. However, since NAFTA was 
put in place, our overall trade deficit has also ballooned, from $75 
billion in 1993 to $489 billion in 2003. The current account deficit 
hit a dangerously high 5 percent of GDP, slowing any possibility of 
strong economic recovery and undermining future job growth. The high 
import propensity of the U.S. economy means that even as economic 
recovery gets under way, a large proportion of every dollar spent by 
consumers goes to purchase imports, undermining the economy's ability 
to generate good jobs at home.
    These figures are very real to working Americans who are losing 
family-supporting jobs and benefits as manufacturing and even service 
jobs are lost overseas.
    U.S. goods exports actually fell in 2001 and in 2002, exposing the 
falsehood that current U.S. trade policies are enhancing our 
competitiveness in overseas markets. In 2002, total U.S. goods exports 
were only $694 billion, down almost $90 billion from the 2000 level. In 
2003, exports recovered weakly, to $714 billion, still well below the 
2000 level.
    This year's trade figures also reveal other startling weaknesses in 
the U.S. economy, even in those areas which have traditionally been 
considered U.S. strongholds, like services and advanced technology 
products. The trade surplus in services has fallen from $92 billion in 
1997 to $60 billion in 2003. In advanced technology products, 
similarly, the U.S. surplus of $4.5 billion in 2001 turned into a 
whopping deficit of $17.5 billion in 2002, rising to $27 billion last 
year. These trends call into question the conventional wisdom that the 
United States enjoys a permanent and growing comparative advantage in 
the export of services and high-technology goods.
    In general, the experience of our unions and our members with past 
trade agreements has led us to question critically the extravagant 
claims often made on their behalf. While these agreements are 
inevitably touted as market-opening agreements that will significantly 
expand U.S. export opportunities (and therefore create export-related 
U.S. jobs), the impact has more often been to facilitate the shift of 
U.S. investment offshore. In fact, the agreements' far-reaching 
protections for foreign investors directly facilitate the shift of 
investment, and such shifts can fairly be considered an integral goal 
of these so-called ``trade'' agreements. Much, although not all, of 
this investment has gone into production for export back to the United 
States, boosting U.S. imports and displacing rather than creating U.S. 
jobs.
    The net impact has been a negative swing in our trade balance with 
every single country with which we have negotiated a free trade 
agreement to date. While we understand that many other factors 
influence bilateral trade balances (including most notably growth 
trends and exchange rate movements), it is nonetheless striking that 
none of the FTAs we have signed to date has yielded an improved 
bilateral trade balance (including Israel, Canada, Mexico, and Jordan).
    If the goal of these so-called ``free trade'' agreements is truly 
to open foreign markets to American exports (and not to reward and 
encourage companies that shift more jobs overseas), it is pretty clear 
the strategy is not working. Before Congress approves new bilateral 
free trade agreements based on the outdated NAFTA model, it is 
imperative that we take some time to figure out how and why the current 
policy has failed.

                       FREE TRADE OR FAIR TRADE?

    The AFL-CIO believes that increased international trade and 
investment can yield broad and substantial benefits, both to American 
working families, and to our brothers and sisters around the world--if 
done right. Trade agreements must include enforceable protections for 
core workers' rights and must preserve our ability to use our domestic 
trade laws effectively. They must protect our government's ability to 
regulate in the public interest, to use procurement dollars to promote 
economic development and other legitimate social goals, and to provide 
high quality public services. Finally, it is essential that workers, 
their unions, and other civil society organizations be able to 
participate meaningfully in our government's trade policy process, on 
an equal footing with corporate interests.
    NAFTA is a model that has utterly failed to deliver the promised 
benefits to ordinary citizens in any of the three North American 
countries. Yet our government is in the process of negotiating new 
trade agreements with dozens of countries, using NAFTA as a template.
    The success or failure of any future trade and investment 
agreements will hinge on governments' willingness and ability to 
negotiate agreements that appropriately address all of the social, 
economic, and political dimensions of trade and investment, not just 
those of concern to corporations. Unfortunately, NAFTA is precisely the 
wrong starting point.

    Senator Hagel. Ms. Lee, thank you.
    Ms. Lee, let me ask you, is there anything about NAFTA that 
is good?
    Ms. Lee. As I said, the concept that we would lower trade 
barriers between countries is not, in itself, objectionable. 
The question is what sort of conditions we attach to that. I 
would agree with what a lot of people said, that a strong and 
healthy and prosperous Mexico is very much in the interest of 
the United States. We don't see that the particular rules 
contained in NAFTA have really achieved that end. They have 
certainly created pockets of wealth in Mexico, but that wealth 
has not been well distributed.
    We do think, in principle, the concept of having 
enforceable rules, multilateral rules, for trade is useful, and 
more transparency is useful, that governments ought to have to 
put on the table what their procurement policies are, what 
their investment policies are, and so on, but that the balance 
of interest in NAFTA was wrong. It was an agreement that was 
negotiated in order to increase the mobility, the flexibility, 
the profits of multinational corporations. It's succeeded very 
well in doing that. But it hasn't done a good job for workers 
in the three North American countries.
    Senator Hagel. Would you give this panel an idea of a trade 
agreement that is now in existence that's good?
    Ms. Lee. Yes. The AFL-CIO did support the Jordan Free Trade 
Agreement. I understand it's a very small agreement with a 
small country. But we worked very closely with the Clinton 
administration strengthening the workers' rights and 
environmental protections in that agreement. And even though 
they weren't perfect, from our point of view, we thought they 
were a really important step forward. We also worked with our 
Jordanian union counterparts to come up with those provisions. 
So we thought that was a good starting point, and we had hoped 
to be able to build on that foundation. Unfortunately, that 
hasn't been the case.
    We also were very supportive of the Cambodia agreement, on 
a much smaller scale, with respect to textile and apparel quota 
that was, I think, put in place around 1999. Again, that was an 
agreement that tied increased textile and apparel quota to 
compliance with internationally recognized labor standards. Our 
assessment of that agreement is that it's been very effective 
in protecting the rights of Cambodian workers, and also in 
serving the needs of the corporations that have invested there. 
The Cambodian Government and the U.S. Government have worked 
closely together to make sure that workers' rights are 
respected. And, in that case, we have been very supportive of 
that model.
    Senator Hagel. Do you believe NAFTA is salvageable, or, in 
your opinion, would we start all over, or can you amend it, can 
you adapt it?
    Ms. Lee. We would like to see NAFTA reformed and fixed. 
We'd like to see the workers' rights and environmental 
provisions strengthened. We'd like to see Chapter 11 revisited, 
and the government procurement and the intellectual property 
rights possibly revisited. But, yes, I think it certainly would 
be possible to negotiate a good trade agreement between the 
United States, Mexico, and Canada.
    Senator Hagel. Let me ask you about consumers. Do you 
believe American consumers have gained over the last 10 years 
because of NAFTA?
    Ms. Lee. I believe prices have come down somewhat and that 
that has been an advantage for consumers; however, when you 
look at the real wage trends, that takes into account the fall 
in consumer prices, whatever changes in inflation have occurred 
over that time. On that front, even though as Fred Bergsten 
said, there were some important wage gains in the late 1990s 
for American workers, many of those have eroded, and we see 
very slow wage growth again now in the last couple of years.
    So for American workers, the real wage numbers already 
factor in the consumer gains, and those numbers have been very 
disappointing for American workers, overall.
    There's been quite a bit of research on the growth in wage 
inequality. Most of the conclusions are that trade is not the 
only factor contributing to the growth in wage inequality over 
the last 20 or 25 years, but it is a significant factor that 
has, in fact, exacerbated wage inequality in the United States 
over that period.
    Senator Hagel. And you would apply this to both non-union 
and union workers----
    Ms. Lee. That's right.
    Senator Hagel [continuing]. Slash, consumers.
    Ms. Lee. Yes, that's the real wage figures don't stop at 
union workers.
    Senator Hagel. Thank you.
    Let me ask our other two panelists to respond to some of 
the things that you've said, because I see that they have been 
writing notes furiously, and I would not want to disabuse them 
of an opportunity here. But in a couple of specific areas, the 
points that Ms. Lee brings out, I think, need to be addressed.
    One is the issue that she mentioned regarding large trade 
deficits with Mexico and Canada, and that will be one of the 
issues I'll want each of you to respond to. Does it matter? 
Does it hurt? Is it important? Is it right? Is it wrong?
    And the second is what we just talked about, about not just 
the American worker/consumer. As Ms. Lee has said--I think I'm 
generalizing here correctly--that when you factor it all in, 
maybe they haven't--the consumer hasn't come out that well. But 
also--that part, but she also mentioned that the Mexican worker 
has not benefited, I think. Isn't that right? So those areas, 
gentlemen, if you could address, I would appreciate it.
    Dr. Bergsten.
    Dr. Bergsten. Ms. Lee raised the issue, which is something 
of a puzzle and a conundrum to most people, of the relationship 
between the big increase in our trade deficit and the 
employment situation in the United States. But think of it the 
following way.
    In the 1990s--take the decade as a whole--our trade deficit 
grew from virtually nothing to almost half a trillion dollars. 
Simultaneously, we created 40 million new jobs and the 
unemployment rate dropped from 7\1/2\ or 8 percent early in the 
decade to less than 4 percent at the end of the decade. So 
there was an obviously huge inverse correlation between the 
growth of the trade deficit and the employment situation.
    I tried to explain part of that conundrum in my remarks by 
suggesting that the dramatic increase in the level of trade--
U.S. engagement in the world economy--was a major factor 
underlying the productivity growth that enabled us to run 
economic growth of 4 percent or more for most of the second 
half of the 1990s. That, in turn, enabled Alan Greenspan and 
the Federal Reserve to let the unemployment rate go down 
without fear of inflation and without a need to raise interest 
rates, as had always occurred over the previous 20 years or so 
when U.S. unemployment got below 6 percent.
    Even with the increase in the trade deficit--and I come to 
that in a minute--the sharp increase in U.S. involvement with 
the world economy was a central factor generating the 
productivity growth which generated the economic growth that 
generated the non-inflationary job creation that was a huge 
benefit for American workers and everybody else in our economy.
    What caused the growth in the trade deficit was almost 
primarily two things. One was the enormous overvaluation of the 
exchange rate of the dollar that occurred during that period. 
Because we were growing fast, because we were doing much better 
than any other economy in the world, huge amounts of capital 
flowed in, drove the dollar to overvalued levels, priced our 
firms out of many world markets, and shifted us from a rough 
current account balance in the early part of the 1990s to a 
huge deficit. The problem was the exchange rate of the dollar.
    The second problem was simply the fact that we were growing 
so much faster than everybody else and that our demand was thus 
growing so much faster than everybody else. Part of that 
spilled over into imports; our market grew much faster than the 
foreign markets for our exports grew.
    So those two things together explain--or, in fact, in most 
models overexplain--the increase in the trade deficit. It has 
nothing to do with a reduction of trade barriers through NAFTA, 
the WTO, or anything else. And I'll stick with my statement 
that--everything else held equal, the economist's crutch--we 
gained, even in trade-balance terms, from the changes in trade 
barriers, which was the issue of NAFTA.
    One could go back and say that NAFTA made a huge error: it 
did not address the exchange rate and it did not address 
macroeconomic policy. Doing so would be a big change in trade 
legislation, trade policy, and trade negotiations. Some people 
have proposed that. It's not a ridiculous idea. It ought to be 
considered in the future. But I would submit that the large 
positive job and economic growth effects of the 1990s were 
partly due to the trade policy liberalization of that time and 
that, I think, explains to some extent the conundrum that Ms. 
Lee was talking about.
    What about the effect on the Mexicans? I'm not sure of the 
numbers that she mentioned. I'm not sure if they're in dollar 
equivalents or local-currency equivalents.
    Ms. Lee. Local currency.
    Dr. Bergsten. If they're local-currency equivalents, I've 
got to be skeptical of them.
    In the second half of the 1990s, Mexico experienced its 
best growth performance of the 20th century. Despite the peso 
crisis in 1994-1995, Mexico, in the second half of the 1990s, 
averaged over 5 percent economic growth per year under the 
Zedillo presidency. It was the most rapid sustained economic 
growth in the history of Mexico in the 20th century.
    I'm prepared to accept that there was an increase in income 
inequality in Mexico, that the highest 10 or 20 percent of the 
population grew more and had better results. That is, indeed, 
one of the results of globalization almost everywhere, 
including in our own economy. But to suggest that 90 percent of 
the population saw no improvement and that average real wages 
were down by 7 percent in the face of economic growth of that 
type does not sound logical. You can probably find a time 
period, if you base your calculation just before the peso 
crisis and then take into effect the big hit from the peso 
crisis for a couple of years; when the comeback won't fully 
offset it and that may be the result that Ms. Lee was talking 
about. But I think an equally plausible base would be to say 
that they had a huge peso crisis that was due to bad 
macroeconomic policy and had nothing to do with NAFTA and, from 
that base, what has been the change in performance over the 
last 6, 7, or 8 years? On that count, the result has got to be 
very positive.
    Senator Hagel. Mr. Vargo.
    Mr. Vargo. Mr. Chairman, you cannot simply look at a change 
in the trade deficit with Canada and Mexico, because our trade 
deficit with the world grew from $115 billion to $550 billion. 
Our largest increase in our deficit was not with NAFTA, it was 
with Europe. And there's no U.S./European Free Trade Agreement. 
The same factors that led to that--and I agree with Fred 
Bergsten--that is the overvalued dollar, and it is a more rapid 
growth rate in the U.S. economy.
    But in looking at the NAFTA agreement, one has to ask, what 
would have happened in its absence? And here, I commend an 
excellent study by the Congressional Budget Office, which 
concluded that the bulk of the trade flows would have happened 
pretty much the way they did, although our exports after the 
NAFTA agreement picked up somewhat more than our imports.
    And as I do a less sophisticated analysis and just look at 
what happened, and say, you know, our exports to the NAFTA 
countries grew twice as fast after the NAFTA agreement than our 
exports to the rest of the world did, while our imports only 
grew 30 percent faster. One has to ask, would the trade deficit 
with the NAFTA countries have been worse without the NAFTA 
agreement? And I think they would have been. So just saying, 
the deficit grew, is absolutely not enough.
    I'd like to point out, on the real Mexican wages, you know, 
right after the NAFTA agreement came into effect, there was a 
collapse in the peso, not because of the NAFTA agreement, but 
because of a variety of political and economic factors, 
including maintaining an overvalued peso too long. And there 
was a crisis in net investment inflows. It wasn't that 
investment flowed into Mexico; it suddenly virtually stopped. 
The Bank of Mexico could not maintain the value of the 
currency, didn't have the reserves to maintain it, and the peso 
went way down. And this had a dramatic effect on our trade with 
Mexico, and a dramatic effect on real wages in Mexico. But you 
have to go a couple of years past that to look at the rapid 
rate of recovery in Mexico after that.
    Dr. Bergsten. Could I just add one point? There is one 
episode where we know that NAFTA had an effect on the U.S. 
trade balance with Mexico in a favorable direction. It was in 
the wake of the peso crisis.
    In the wake of the peso crisis, Mexico responded to non-
NAFTA partners as it had to all partners after the debt crisis 
in the early 1980s--namely, it restricted imports very sharply. 
It could no longer do so toward the United States or Canada 
because of NAFTA. And clearly it would have done so otherwise. 
That was the lock-in of reforms I was talking about. In that 
case, it occurred preferentially in our favor. Indeed, the U.S. 
share of Mexican imports jumped sharply in the wake of the peso 
crisis because they put controls on imports from China, Japan, 
Europe, and almost everybody else. But they couldn't do it to 
us because of NAFTA. So we gained--or lost less--in the wake of 
the peso crisis, in terms of our exports to Mexico, because of 
the NAFTA commitments. That's the one unambiguous effect we 
know about and it was favorable for the United States.
    Mr. VArgo. Mr. Chairman, could I make one additional 
point--just another way of looking at our trade deficit with 
Mexico, which has grown a lot. If you exclude just two product 
areas--crude oil, our trade balance in crude oil, and in motor 
vehicles and parts--you'll see that we have balanced trade with 
Mexico. The entire deficit is in those two areas. So if there 
has been a huge--and I don't think most people are going to 
argue that the increased imports of crude oil from Mexico have 
cost us jobs--so then you'd have to look at the auto sector, 
and that's one that's worth looking at more closely. But when I 
look at it, I see that we had a more rapid increase in 
automotive jobs in the United States after NAFTA than before. 
And even today, after the 2000 to 2003 difficulties, serious 
difficulties, in manufacturing, we have more people employed in 
the U.S. auto industry even today than we did before NAFTA.
    Senator Hagel. Ms. Lee.
    Ms. Lee. I'd like to come back on a couple of issues. One 
is that I actually don't disagree that the overvalued dollar 
and the unequal growth of the U.S. relative to the rest of the 
world and our trading partners were some of the major factors 
behind the growth in the overall U.S. trade deficit, and even 
with Mexico and Canada, as well.
    The point I wanted to make was a little bit different, and 
maybe more subtle, which is that NAFTA was supposed to increase 
our ability to sell to Mexico and Canada, and I don't believe 
it succeeded on that front. Even given the dramatic difference 
in initial tariffs between the United States and Mexico, it 
didn't deliver. My argument would be that the reason it didn't 
deliver is that it was never designed to be a market-opening 
agreement so much as it was an investment shifting agreement: 
that NAFTA was actually designed to shift production from the 
United States to Mexico and maybe, to some extent, to Canada to 
rationalize production, as was discussed earlier. The outcome 
of that certainly is very favorable for multinational 
corporations, but the workers don't have the ability to cross 
the border the way the companies do. They're stuck here in the 
United States; they've got to take what's left for them, and on 
that front, this hasn't been good.
    I also want to talk a little bit about the peso crisis, 
because I think it's an important question, whether there was 
any connection whatsoever between the peso crisis and NAFTA. 
Certainly, people have argued that one of the reasons that the 
Mexican Government kept the peso overvalued was to get NAFTA 
past the U.S. Congress, that it was convenient for Mexico to 
have a trade surplus with the United States while NAFTA was 
being debated. But even if you put that aside, I think it's 
not--that was a real impact. A lot of proponents of NAFTA said 
that if we passed NAFTA, there wouldn't be a peso crisis. And 
that was wrong. That was another of the arguments made by NAFTA 
boosters that turned out to be wrong. I have a lot of the pre-
NAFTA editorials and op-eds, and so on, and here are a lot of 
wrong arguments that were made at that time. The overselling of 
NAFTA was conceded, in a very minor way, by Secretary Aldonas 
and Secretary Wayne, but I think maybe not to the extent that 
was necessary. And the free trade agreements that USTR is 
negotiating now are being sold in exactly the same terms, that 
they are going to open markets and miraculously lift countries 
out of poverty and improve the U.S. trade balance, and so on. I 
think it's important that we look honestly at the 10-years of 
experience with NAFTA and admit to ourselves that it really 
didn't deliver on many of those fronts.
    And there were a lot of other things happening. The world 
is a complicated place. NAFTA is only one small piece of the 
changes that happened in the United States and Mexico over that 
period of time. But I think we all have to be careful that we 
don't either take everything good that happened in the United 
States, including the rapid job growth of the 1990s, and 
attribute it to NAFTA, or take everything bad and put it at the 
feet of NAFTA, as well.
    Senator Hagel. Thank you.
    Dr. Bergsten. Mr. Chairman.
    Senator Hagel. Dr. Bergsten.
    Dr. Bergsten. I would just make two quick points. On the 
point that Ms. Lee made about U.S. exports to the NAFTA 
countries, I was struck by a sentence in Frank Vargo's 
testimony that he didn't say orally but I want to quote it: 
``Since 1993, the growth in our exports to Canada and Mexico 
was as large as the growth in our exports to the rest of the 
world combined.'' So it was an export expansion engine. I won't 
go back and try to figure out what the motives were, but the 
effect has clearly been to expand our exports to the NAFTA 
partners much faster than to the rest of the world. So I'd say 
that one certainly succeeded.
    On the point about the peso crisis, I, as a NAFTA 
supporter, certainly never said at the time that there would 
never be a devaluation of the Mexican peso. Indeed, I remember 
saying frequently that I was worried by the lack of any link in 
NAFTA to exchange rates and the financial side because we know, 
from the history of economic development, that whenever a 
developing country opens up its trade regime and liberalizes 
its imports that a deterioration in its trade balance is likely 
to result, which will, in fact, require a devaluation of its 
currency. That is almost standard development theory. I guess 
it was convenient for people to ignore that when they were 
discussing NAFTA and its ratification in both countries. I, for 
one, recall talking about that at the time, believing in fact 
there should have been such a link--maybe this is just my 
Treasury background coming to the fore because I renegotiated 
the U.S.-Mexican swap agreement while I was at the Treasury and 
knew it might have to be used in this context.
    Ignoring the exchange-rate side is a gap in our trade 
policy. We have never been very good at linking our trade 
policy with our exchange rate and international financial 
policy. We're seeing that in spades now with the massive trade 
deficit caused, in large part, by currency misalignments. The 
failure of our Treasury to implement U.S. law requiring it to 
hit countries that manipulate their currencies, as several East 
Asians are now doing, and the failure of the IMF to implement 
its own statutes to call those practices to the table, is a big 
problem and I'd certainly be the last to deny that changes 
there are badly needed.
    Senator Hagel. Mr. Vargo.
    Mr. Vargo. Mr. Chairman, Thea and I are old friends, but I 
have to disagree on the investment point, that NAFTA was 
designed to move production out of the United States. And if 
that's what it was designed to do, it didn't succeed very well.
    I want to reiterate that the large increase in Mexico's 
share of U.S. foreign direct investment--at least in 
manufacturing--occurred before NAFTA, not after. If you'll 
recall, I said in 1983, 4.1 percent of our foreign direct 
investment in manufacturing went to Mexico; in 1993, it had 
risen to 4.8. That's a seven-tenths of a percent increase. And 
then now it's 4.9.
    Now, why has it increased proportionately less? Mexico is a 
better place to invest. Why wouldn't it have grown faster? And 
the answer to that is because Mexico also had to get rid of a 
lot of investment performance requirements. If you wanted to do 
business in Mexico before NAFTA, you had to invest there. 
Afterwards, you did not. So the combination of these two forces 
has led to a very modest increase in U.S. investment.
    Now, Mexico, on the other hand--and I think this is 
important to point out--has attracted a lot of investment from 
other countries in the world--Japan, Korea, others--as they put 
production facilities in Mexico to export to the U.S. But much 
of that trade almost certainly was in lieu of the exports that 
they were shipping from their countries earlier.
    Senator Hagel. Let me ask one last question of each of 
you--in fact, stay on this subject of investment, because Ms. 
Lee had raised it a couple of times, and you each have raised 
it.
    In your opinions, are the investment mechanisms within 
NAFTA working as they should work? There's been some, I think, 
reference here to the fact that maybe we should review some of 
that, adjust some of that. We know trade agreements are not 
static; they're dynamic, they reflect markets; and so they are 
evolving.
    But, in particular, stay on the issue of the investment 
mechanisms within NAFTA. Have they worked? Have they provided 
the kind of forums that we need in order to adjust to markets?
    Mr. Vargo. Well, I think, Mr. Chairman, they have. I think 
that they have ensured that American investors will be treated 
more favorably than they otherwise would have been in 
investment disputes, and the ability to go to arbitration is a 
very important one.
    Now, there have been a lot of concerns raised here. It's 
absolutely not so that NAFTA can overturn U.S. law. Only U.S. 
courts can do that. Now, the only thing a NAFTA panel can do is 
to award a compensation for expropriation. Now, there is a 
feeling that, oh, this puts a chilling effect on the U.S.--or 
state or local ability to legislate. There's no such evidence. 
But there has been this fear. And largely in response to this 
fear in the Trade Promotion Authority Act, the Trade Act of 
2002, a lot of adjustments were made. They were made, in terms 
of seeing that the possibility for cases without foundation 
could not be brought, that there would be an appellate 
mechanism, that there would be a much greater transparency. And 
certainly as an association, the NAM agreed with those. We note 
that there was really no foundation for them, but that they 
would improve the perception. And those have gone into future--
into trade agreements since NAFTA.
    We have to have the ability to go to third-party 
arbitration, Mr. Chairman, in other countries, because other 
countries' court systems are not the same quality as the U.S. 
system. And under the Constitution, a foreign investor really 
gets the same rights with or without the third-party 
arbitration or the so-called investor state dispute, but we 
don't in other countries, so we have to have it.
    Senator Hagel. Dr. Bergsten.
    Dr. Bergsten. I'm going to be uncharacteristically 
uncertain in responding to that one because I haven't 
personally studied as much as I should. My colleagues Hufbauer 
and Schott have looked at it carefully in their overall review 
of NAFTA. Another of my colleagues, Monty Graham, who studies 
investment for us, has looked at it carefully, particularly 
Chapter 11 on investor-state disputes. I'd like to submit our 
thoughts to you on that for the record.\1\
---------------------------------------------------------------------------
    \1\ Dr. Bergsten's subsequent response can be found on page 83.
---------------------------------------------------------------------------
    Dr. Bergsten. I would just make two quick observations. 
One, I'm not as impressed as Frank Vargo is by the flatness in 
the share of U.S. total foreign direct investment in Mexico 
since the creation of NAFTA. The reason for that is--as I've 
studied economic integration experiments throughout the world--
that you tend to find that the big investment effects actually 
occur prior to the installation of the new trade liberalization 
agreement. They come from anticipation of the new agreement by 
the private sector trying to get in at the early stage, in 
order to get a leg up on the process. NAFTA started being 
negotiated in 1990-1991. It was well known for 2 or 3 years 
that it was going to happen. And so by the time it happened a 
lot of the investment that could be attributed to NAFTA, and 
the associated Mexican reforms to qualify for NAFTA, had 
already taken place. So I'd want to look at the numbers in a 
little more comprehensive way. If they occurred in the early 
1990s, I'd say it's still a NAFTA effect. So it may well be 
that the outcome was quite pro-investment.
    The other thing is, just to repeat, Mexico's own policy 
toward foreign investment was opened up dramatically by NAFTA. 
It was one of the reforms that were part and parcel of the 
deal. And I think, again, for Mexico--and, through Mexico, for 
us--that was unambiguously a good thing.
    Indeed, Mexico did something quite interesting. They were 
only required, under the NAFTA, to open up their investment 
regime to the United States and Canada, as NAFTA partners. But 
Mexico chose to open its investment regime on a global basis, 
to generalize to all of its international trading partners and 
investment partners the same newly liberalized rules that 
applied to the United States and Canada. And so the bang for 
the buck, in terms of getting Mexico to open up and, thereby, 
improving its economic prospects, was actually even greater 
than just vis-a-vis the NAFTA partners themselves.
    Senator Hagel. Thank you.
    Ms. Lee.
    Ms. Lee. On the NAFTA investment provisions, we have a very 
strong objection to the inclusion of investor-to-state dispute 
resolution in any trade agreement. It's something which is not 
necessary for a trade agreement. Some of these disputes could 
be adjudicated in a government-to-government forum, as 
everything else in the trade agreement is done. But giving a 
private corporation the right to sue governments and to 
potentially have large taxpayer liability seems, to us, 
extremely problematic and not necessary. Companies can get 
their rights taken care of by their own governments as they do 
through the other portions of the trade agreements.
    And I would disagree with Frank Vargo. I know, obviously, a 
NAFTA tribunal cannot itself overturn a U.S. law, but the 
ability to impose compensation, which could be on the order of 
a billion dollars in tax liabilities and tariffs and so on, is 
a pretty significant impact, and has, of course, had a huge 
impact on governments in all three of the NAFTA countries.
    There have been laws that have been overturned in Mexico. 
One of the most well known was a case where a U.S. company, 
Metalclad, challenged a Mexican locality that had refused to 
give permits for a toxic-waste dump on a locality where they 
felt that would be damaging to the groundwater. And the 
government was forced to pay--was ordered to pay $17 million to 
the U.S. company. So this is a government paying a company for 
a failure to grant a permit that might have had an 
environmental impact.
    Some of the other cases, I think, also show that there's 
clearly been a chilling effect on domestic regulation. Whether 
you think that's important or not, I guess, depends on whether 
you think the regulation was worthwhile in the first place. But 
our preference is to allow domestically elected legislators to 
make the laws, and not to allow a private company to challenge 
those laws because its profits were damaged or impaired.
    The other example that is really interesting is one that 
doesn't get a lot of attention, but demonstrates the chilling 
effect very well. This was back in 1995, when the Canadian 
Government was contemplating putting in place a provision that 
would require cigarettes to be sold in plain packages. This was 
a public-health initiative. The idea was to make cigarettes 
less attractive to teenagers and children--make smoking less 
attractive, overall. The U.S. tobacco companies used Chapter 11 
to bring a case--it was written by Julius Katz, one of the 
negotiators of NAFTA--to challenge the Canadian Government, to 
ask for millions of dollars in damages. The Canadian Government 
withdrew the provision, not wanting to go through the dispute 
settlement. They don't know whether they would have won or 
lost, but they weren't willing to face the risk.
    When NAFTA was being negotiated, people didn't tell us that 
public-health legislation that democratically elected 
legislators wanted to put in place would be found illegal under 
NAFTA. It was talked about as a trade agreement. I think we 
have to be very careful about where we draw the line between 
trade agreements having an impact on totally legitimate 
domestic, environmental, public-health, and labor protections. 
I think NAFTA Chapter 11 goes way over the line.
    One final quick example has to do with that article that 
was in the New York Times on Sunday. It was about a U.S. jury 
award that was challenged by a Canadian company, the Lowen 
case, where there was a very high jury award given against a 
Canadian company. At some point, the Canadian company changed 
hands and was now owned by an American, and they were told, 
well, as an American company, you couldn't bring this case. 
Only a Canadian company could bring a case. This demonstrates 
the argument that critics of Chapter 11 have made, which is 
that Chapter 11 actually gives greater rights to foreign 
investors than it does to domestic investors, and I think 
there's something wrong with that picture.
    Thank you.
    Mr. Vargo. Mr. Chairman.
    Senator Hagel. Mr. Vargo.
    Mr. Vargo. Thea keeps saying that these panels under 
Chapter 11 can find laws illegal. That's not so. All they can 
do is to have a financial finding of compensation.
    Thea also says that she disagrees that American 
corporations have the right to sue the U.S. Government. But 
that's a constitutionally guaranteed right, whether or not we 
have a trade agreement. There is--the choice of venue is 
available for foreign investors. Do you go through the domestic 
court system, or do you go to third-party arbitration? But this 
is relevant only if you're going to get a different finding by 
going through arbitration than you do through the domestic 
court system. And in the United States, there's no evidence 
that that is so.
    But there's a considerable body of evidence saying that 
U.S. investors are at risk in the court systems of many other 
countries, because, unfortunately, they are not as honest and 
well developed as ours.
    Senator Hagel. Well, each of you has helped enlighten this 
panel on NAFTA and questions, concerns, future, and we greatly 
appreciate your time here and your thoughtful presentation.
    Dr. Bergsten, we would keep the record open for your 
colleagues to submit a statement in reference to the last 
question, if you'd care to do that.
    Again, the panel is very appreciative of your good work. 
Thank you.
    The subcommittee is adjourned.
    [Whereupon, at 4:55 p.m., the subcommittee adjourned, to 
reconvene subject to the call of the Chair.]


                              ----------                              


           Subsequent Response of Dr. Bergsten for the Record


                   Investment Provisions Under NAFTA*
---------------------------------------------------------------------------

    *Extract prepared by Yee Wong from a full chapter on dispute 
settlement, ``NAFTA: A Ten Year Appraisal,'' by Gary Hufbauer and 
Jeffrey Schott.
---------------------------------------------------------------------------
                              INTRODUCTION

    The United States sought improvements on the 1989 Canada-US Free 
Trade Agreement (CUSFTA) investment provisions by providing for 
international arbitration of investment disputes, by broadening the 
coverage of dispute procedures, and by prohibiting additional 
performance requirements not addressed in CUSFTA. US officials were 
generally satisfied with the Chapter 11 dispute settlement mechanism 
that enabled private investors to seek a binding arbitration of 
disputes with NAFTA governments.\1\
---------------------------------------------------------------------------
    \1\ US Intergovernmental Policy Advisory Committee (1992).
---------------------------------------------------------------------------

                 ENFORCEMENT OF GOVERNMENT OBLIGATIONS

    The NAFTA dispute settlement process (DSP) is unique in allowing 
private investors to enforce government obligations under NAFTA 
Articles 1116 and 1117. For DSP purposes, the definition of investment 
is broadened to include minority interests, portfolio investment and 
real property.\2\ In the event that a state breaches one of NAFTA 
Chapter 11's substantive obligations, the investor may initiate an ad 
hoc arbitration tribunal, pursuant to Article 1120. The tribunals 
operate under the arbitration rules of either the International Center 
for Settlement of Investment Disputes (ICSID) or the United Nations 
Commission on International Trade Law (UNCITRAL).\3\ Chapter 11 
tribunals award monetary relief to the winning party.
---------------------------------------------------------------------------
    \2\ NAFTA Article 1139. In the S.D. Myers case, for example, 
investment in US-based waste disposal operations was compared to 
investment in similar Canadian waste-disposal operations. Cosbey 
(2002).
    \3\ NAFTA arbitration rules allow investors to bring claims under 
the following conditions: the investor has suffered loss or damage due 
to the breach in NAFTA obligations (Articles 1116, 1117); the disputing 
parties have attempted but failed to settle the claim through 
consultation or negotiation (Articles 1118, 1120); arbitration was 
initiated within six months of the events giving rise to the claim 
(Article 1120); and the investor waives the right to initiate similar 
proceedings for compensation before domestic courts and other tribunals 
(Article 1121).
---------------------------------------------------------------------------
    By contrast, the WTO does not grant substantive rights to private 
parties or give them access to the dispute settlement mechanism. The 
WTO is designed as an inter-state agreement. Non-parties to a dispute, 
such as private firms and NGOs, are limited at most to submitting 
amicus curiae briefs in panel hearings.\4\
---------------------------------------------------------------------------
    \4\ WTO Article V, as interpreted by the Appellate Body. Third 
parties may submit amicus curiae briefs but the Appellate Body has no 
legal obligation to accept non-WTO member submissions. Since its ruling 
in the EU-Peru sardines case (October 2002), the policy of the 
Appellate Body is to consider amicus curiae briefs on a case-by-case 
basis, and accept them if the briefs are pertinent and useful to that 
particular case. If an amicus brief interferes with the ``fair, prompt 
and effective resolution of trade disputes,'' the Appellate Body can 
reject the consideration of any amicus curiae brief. Prior to the WTO 
EU-Peru sardines case, the Appellate Body had not considered an amicus 
curiae brief pertinent to any WTO case. Most developing countries 
opposed the acceptance of amicus curiae briefs by WTO panels, arguing 
that amicus submissions give NGOs and private parties a greater role in 
dispute proceedings than WTO members acting as third parties, without 
corresponding obligations. Correspondence with Amy Porges of Sidley, 
Austin, Brown & Wood LLP, Washington, DC, and Debra P. Steger of Thomas 
& Partners, Ottawa, Canada.
---------------------------------------------------------------------------
    For reasons not anticipated when Chapter 11 was drafted, protection 
of investor rights has since become the most contentious feature of the 
NAFTA dispute system. NAFTA's substantive rules on investor rights were 
carried over from CUSFTA. These include investment liberalization 
rights for foreign investors (Article 1101), as well as guarantees to 
protect existing investments established under conditions more 
favorable than those scheduled in the national reservations of 
individual NAFTA members (Article 1108).\5\ However, the investor 
provisions that have sparked the most disputes filed under Chapter 11 
are: national treatment rights (Article 1102); MFN rights (Article 
1103); minimum international standards of treatment (Article 1105); 
performance requirements (Article 1106); and especially provisions for 
compensation in the event of expropriation (Article 1110).
---------------------------------------------------------------------------
    \5\ Under Article 1108 (4), no party may ``require an investor of 
another Party, by reason of its nationality, to sell or otherwise 
dispose of an investment existing at the time the measure becomes 
effective.'' Other rights and obligations covered under Chapter 11 are: 
compensation for acts of war or civil strife (Article 1105(2)), 
prohibitions on senior management nationality requirements (Article 
1107), and an environmental protection provision--members are not 
allowed to reduce environmental standards as a way of attracting 
investment (Article 1114).
---------------------------------------------------------------------------
    Articles 1102 and 1103 stipulate that a host country must treat 
foreign investors and their investments ``no less favorably'' than 
domestic investors or investors from any other country ``in like 
circumstances.'' Article 1103 is an extended version of the national 
treatment provisions contained in CUSFTA. This provision ensures that 
foreign investors based in North America will enjoy the best possible 
treatment among all foreign investors, even when one of the parties 
scheduled a NAFTA reservation against national treatment.\6\ Article 
1105 requires that NAFTA members meet minimum standards of 
``international law, including fair and equitable treatment and full 
protection and security.'' This provision is the functional equivalent 
of most-favored-nation (MFN) treatment. Article 1106 prohibits 
governments from imposing certain types of performance requirements on 
investors.\7\
---------------------------------------------------------------------------
    \6\ Vega and Winham (2002).
    \7\ As an example, governments cannot demand that firms use 
domestic inputs. The complete list of prohibitions on performance 
requirements include government thresholds on: exports of a given 
portion of production; using a given level of domestic content; making 
foreign exchange available based on the firm's levels of imports or 
exports; showing preference for domestic goods or services; requiring a 
firm to transfer its technology; or requiring a firm to locate 
production, provide employment, or offer specific services within its 
domestic territory.
---------------------------------------------------------------------------
    The most criticized provision, Article 1110, is controversial 
because it attempts to balance investor rights against government 
measures to protect public welfare. Article 1110 of NAFTA states that a 
host country cannot expropriate a foreign investor directly or 
indirectly, unless the expropriation is explicitly done for a public 
policy purpose, on a nondiscriminatory basis, in accordance with due 
process of law. These restrictions apply to measures ``tantamount to 
nationalization or expropriation.'' Moreover, the government must 
provide fair compensation for any expropriation.

                      OUTCOME OF CHAPTER 11 CASES

    Through August 2004, 31 investor-state disputes were initiated 
under Chapter 11.\8\ The details are summarized in appendix A. The 
number of cases filed has steadily increased over time.\9\ Fourteen 
cases have been initiated against Mexico, nine against Canada, and 
eight against the United States. US investors account for two-thirds of 
the cases initiated; only two cases have been initiated between Mexico 
and Canada.\10\ The frequency of cases roughly mirrors the amount of 
FDI and bilateral trade between the disputing parties (see table 3 
comparing the number of disputes between countries and the 
corresponding bilateral FDI).
---------------------------------------------------------------------------
    \8\ For a complete description of cases, see Canada Department of 
Foreign Affairs and International Trade at www.dfait-maeci.gc.ca/tna-
nac/nafta-e.asp (accessed August 2004).
    \9\ Mark Clodfelter at the US State Department NAFTA Arbitration 
Division, notes that one concern is the high proportion of Chapter 11 
cases that are disguised as trade disputes rather than investment 
cases. Another concern is that significant increases in investor-state 
disputes created threatens the availability of arbitrators in Chapter 
11. Based on Mark Clodfelter presentation, Canadian-American Business 
Council and CSIS, June 16, 2004.
    \10\ See Appendix A and table 2.
---------------------------------------------------------------------------
    As of August 2004, US investors and the US government have been 
wholly or partly successful in ten Chapter 11 cases that have been 
decided. However, in none of the cases has the investor been awarded an 
amount close to its initial (probably overblown) claim. The cases in 
question are: Ethyl Corporation vs. Canada, Metalclad Corporation vs. 
Mexico, Azinian vs. Mexico, Marvin Feldman vs. Mexico, S.D. Myers vs. 
Canada, Pope & Talbot vs. Canada, Mondev International vs. United 
States, ADF Group Inc. vs. United States and USA Waste vs. Mexico 
(submitted twice). Five cases have been withdrawn and another 16 cases 
are pending determination. Tribunal awards to successful claimants have 
so far totaled around $35 million (see appendix A).\11\ Arbitral awards 
are small relative to initial claims--on average, they amount to only 
11 percent of the original claim. In the most extreme case so far (Pope 
& Talbot), the final NAFTA arbitral award represented only 0.5 percent 
of the original claim.\12\ Nevertheless, the process shows that private 
investors can hold NAFTA governments accountable to their Chapter 11 
obligations.
---------------------------------------------------------------------------
    \11\ About $35 million plus interest for damages and cost of 
tribunal proceedings.
    \12\ Pope & Talbot's initial claim was $130 million but the NAFTA 
tribunal awarded final costs and damages totaling $581,766 plus 
interest. For details, see Canada Department of Foreign Affairs and 
International Trade at www.dfait-maeci.gc.ca/tna-nac/NAFTA-e.asp 
(accessed August 2004).
---------------------------------------------------------------------------
    As of August 2004, nine environment-related disputes had been 
brought under Chapter 11, eight of which were filed by US investors and 
one by Canadian companies. Among these cases, four each were filed 
against Mexico and Canada, and one against the United States. Currently 
about one-third of all Chapter 11 cases are environment-related.
    Nearly half of all investor-state cases claimed violations under 
NAFTA Articles 1102 and 1105 (see table 4). National treatment 
provisions in Articles 1102 and 1103 require governments to treat 
foreign investors based in any NAFTA member country no less favorably 
than domestic investors. Article 1105 requires members to observe the 
minimum standards of ``international law.'' In an effort to address the 
criticism that arbitration panels had overextended Article 1105, in 
August 2001 the NAFTA Commission issued an Interpretive Note stating 
that ``[a] determination that there has been a breach of another 
provision of the NAFTA, or of a separate international agreement, does 
not establish that there has been a breach of Article 1 105(1).'' \13\ 
The third most frequently cited breach of NAFTA obligation is Article 
1110, which provides the basis for ``regulatory takings'' claims.
---------------------------------------------------------------------------
    \13\ For more information about the NAFTA Commission's 
interpretation of Article 1105, see Canadian International Trade 
Minister Pettigrew's press release at webapps.dfaitr-maeci.gc.ca/
minpub/Publication.asp?FileSpec=/Min_Pub_Docs/104441.htm (accessed 
August 2004).
---------------------------------------------------------------------------
                               EVALUATION

    Several principles embodied in NAFTA Chapter 11 established 
precedents for the WTO Agreement on Trade Related Investment Measures 
(TRIMs) (as well as the OECD's ill-fated Multilateral Agreement on 
Investment or MAI).\14\ Neither the CUSFTA nor the WTO Trade Related 
Investment Measures (TRIMs) agreement grants private foreign investors 
the right to directly invoke and participate in dispute settlement 
cases (nor was such direct access contemplated in the MAI). But private 
investors are expressly given direct access to the NAFTA dispute 
settlement system under Chapter 11, and this has become one of its 
contentious features.\15\ As a result, NAFTA member governments 
publicly narrowed the scope of foreign investment protections under 
Chapter 11 and the US government adopted more restrictive language in 
recent free trade agreements with Chile, Singapore and Central 
America.\16\
---------------------------------------------------------------------------
    \14\ The WTO accord prohibits (apart from scheduled exceptions) 
discrimination between foreign and domestic investors (national 
treatment) and between foreign investors from different countries 
(most-favored-nation treatment). It also requires host states to 
compensate foreign investors for direct and indirect expropriations. 
See Kurtz (2002). By contrast, the MAI would have required similar 
treatment of foreign investors in every province of Canada and every 
state of Mexico and the United States. NAFTA only requires that 
investors receive the best treatment provided in that province (or 
state). Barry Appleton, ``Comparing NAFTA and the MAI.'' For complete 
details, see www.appletonlaw.com (accessed August 2004).
    \15\ Some practitioners, like Mark Cymrot of Baker & Hostetler LLP, 
argue that NAFTA governments are only beginning to see the potential 
implications of Chapter 11 as investment disputes face independent 
tribunals rather than governments. See Mark Cymrot, presentation at 
Canadian-American Business Council and CSIS, June 16, 2004.
    \16\ Former Chair of Senate Finance Committee, US Senator Max 
Baucus (D-MT), has called for an appellate mechanism in investor-state 
arbitration under future free trade agreements. The perceived 
overreaching influence of Chapter 11 led Congress to limit investor-
state arbitration clauses in the US Trade Act of 2002. At Australia 
insistence over potential sugar, dairy and beef disputes, the recent 
Australia-US FTA excludes an investment chapter. See Baker & Hostetler 
LLP (2004).
---------------------------------------------------------------------------

                               REFERENCES

    Baker & Hostetler LLP. 2004. Protecting Investors: Can Governments 
Stop the Music? Background Paper Prepared for the Canadian-American 
Business Council and CSIS (June).
    Canada Department of Foreign Affairs and International Trade 
(DFAIT). www.dfait-maeci.gc.ca/tna-nac/NAFTA-e.asp (accessed August 
2004).
    Cosbey, Aaron. 2002. NAFTA's Chapter 11 and the Environment: A 
Briefing Paper for the CEC's Joint Public Advisory Committee. 
International Institute for Sustainable Development (June).
    International Institute for Sustainable Development (IISD). 
www.iisd.org (accessed August 2004).
    Kurtz, Jurgen. 2002. A General Investment Agreement in the WTO? 
Lessons from Chapter 11 of NAFTA and the OECD Multilateral Agreement on 
Investment. Working Paper for New York University School of Law Jean 
Monnet Program (June).
    McMillan, Stephen. 2002. NAFTA Chapter 11: Issues and 
Opportunities. Australian APEC Study Center (July).
    North American Commission for Environmental Cooperation (CEC). 
www.cec.org (accessed August 2004).
    Public Citizen. 2001. NAFTA Chapter 11 Investor-to-State Cases: 
Bankrupting Democracy (September).
    Rugman Alan M. and Michael Gestrin. 1993. The Investment Provisions 
of NAFTA. The Fraser Institute.
    United States Department of State. 2004. NAFTA Investor-State 
Arbitrations. http://www.state.gov/s/l/c3439.htm (accessed August 
2004).
    United States Intergovernmental Policy Advisory Committee (IGPAC). 
1992. Report on the North American Free Trade Agreement (September).
    Vega and Winham. 2002. The Role of NAFTA Dispute Settlement in the 
Management of Canadian, Mexican and US Trade and Investment Relations 
(November). Draft.
    Weiler, Todd, ed. 2004. NAFTA Investment Law and Arbitration: Past 
Issues, Current Practice, Future Prospects. Ardsley: Transnational 
Publishers.



                                 
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