    [Senate Hearing 109-474]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-474

         SECURING AMERICAN SOVEREIGNTY: A REVIEW OF THE UNITED STATES'
                           RELATIONSHIP WITH THE WTO

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

                                    HEARING

                                   before the

                    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                         INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                                     of the

                                  COMMITTEE ON
                             HOMELAND SECURITY AND
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 15, 2005

                                   __________

           Printed for the use of the Committee on Homeland Security
                            and Governmental Affairs

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    _____________________________________________________________________________
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            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                       SUSAN M. COLLINS, Maine, Chairman
    TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
    TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
    LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
    ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
    PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
    JOHN W. WARNER, Virginia

               Michael D. Bopp, Staff Director and Chief Counsel
       Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                          Trina D. Tyrer, Chief Clerk

    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                         TOM COBURN, Oklahoma, Chairman
    TED STEVENS, Alaska                  THOMAS CARPER, Delaware
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
    ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
    PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
    JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                          Katy French, Staff Director
                     Sheila Murphy, Minority Staff Director
                John Kilvington, Minority Deputy Staff Director
                           Liz Scranton, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Coburn...............................................     1
        Senator Levin................................................    15
    Prepared statement:
        Senator Carper...............................................    41

                                   WITNESSES
                             Friday, July 15, 2005

    James E. Mendenhall, Acting General Counsel, Office of the United
      States Trade Representative....................................     3
    Claude Barfield, Ph.D., Resident Scholar, and Director, Science
      and Technology Policy Studies, American Enterprise Institute...    23
    Robert Stumberg, Professor of Law, Harrison Institute for Public
      Law, Georgetown University Law School..........................    26
    Robert Vastine, President, Coalition of Service Industries.......    28

                         Alphabetical List of Witnesses

    Barfield, Claude, Ph.D.:
        Testimony....................................................    23
        Prepared statement...........................................    54
    Mendenhall, James E.:
        Testimony....................................................     3
        Prepared statement with attachments..........................    42
    Stumberg, Robert:
        Testimony....................................................    26
        Prepared statement...........................................    59
    Vastine, Robert:
        Testimony....................................................    28
        Prepared statement with attachments..........................    63

                                    APPENDIX

    Questions and responses for the Record from:
        Mr. Mendenhall...............................................    52

         SECURING AMERICAN SOVEREIGNTY: A REVIEW OF THE UNITED STATES'
                           RELATIONSHIP WITH THE WTO

                                  ----------

                             FRIDAY, JULY 15, 2005

                                         U.S. Senate,
                Subcommittee on Federal Financial Management,
            Government Information, and International Security,
                                of the Committee on Homeland Security
                                              and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 9:31 a.m., in
    room SD-562, Dirksen Senate Office Building, Hon. Tom Coburn,
    Chairman of the Subcommittee, presiding.
        Present: Senators Coburn and Levin.

                  OPENING STATEMENT OF SENATOR COBURN

        Senator Coburn. Good morning. Thank you all for being here
    today. Today's hearing will focus on the direction of the World
    Trade Organization and examine the relationship between WTO
    rulings and American sovereignty.
        Unlike other international institutions in which the United
    States participates, the WTO links its adjudication process to
    an enforcement mechanism. Using this mechanism, international
    diplomats determine if U.S. laws and regulations are acceptable
    or unacceptable, according to the political trade standards of
    the international community. That is probably as it should be.
    If nations don't change laws that WTO rules against, WTO can
    and does impose punitive damages on that nation's taxpayers,
    and trade sanctions.
        Since WTO inception 10 years ago, the United States has
    lost half the cases brought against it by other WTO members--25
    out of at least 50 cases. Already, Congress has repealed two
    laws by WTO dictate. These include the foreign sales
    corporation provisions that were provided a tax benefit for
    U.S. exporters--the modification to that law is presently being
    challenged as well; and the Anti-dumping Act of 1916. Both laws
    were created to protect U.S. financial interests and were
    modified to accommodate the interests of foreign countries and
    their trade positions.
        I would say that I believe in free trade. I believe in fair
    free trade. Americans run and work for the most innovative,
    efficient, and competitive businesses in the world. On balance,
    free and fair trade with every nation benefits every American.
    It is an onerous process to negotiate bilateral trade
    agreements with every other Nation in the world. This process
    could result in confusing and conflicting standards or create
    burdensome consequences on American industry. That is why we
    are in the WTO, and that is why there is marked value to our
    participation.
        When the United States has brought complaints against other
    countries through the WTO, the United States has, for the most
    part, prevailed. But when other countries have brought
    complaints against us, we do far less well. So we need to be
    careful. With adverse rulings from the WTO on the rise,
    Congress must exercise its appropriate oversight authority and
    make sure that the WTO does not cross the line into threatening
    U.S. national interests.
        We need to ensure that the WTO does not misinterpret U.S.
    membership as a license to dictate to democratically elected
    Federal and State legislatures how to govern the affairs of the
    American people. Americans rely on our trade representatives,
    who serve as watchdogs of the WTO, to ensure that the WTO's
    adjudication process does not overstep its mission and impose
    unwelcome and un-voted-on changes in our national affairs.
        Unfortunately, as with other international organizations,
    some of the WTO leadership seem to have higher ambitions for
    this trade body beyond its purpose as a forum for resolving
    trade disputes. WTO leaders pay a lot of lip service to the
    notion of consensus, but we have seen how elusive global
    consensus can be on fundamental matters of right and wrong. Let
    me give you an idea of what I mean. This is a portion of a
    statement given by a former WTO director general in his
    farewell speech entitled ``Beyond the Multilateral Trading
    System.'' The former WTO director general stated:
        ``Not too long ago, the idea of a global system of
    governance would have seemed utopia, no less utopia than the
    fall of the Berlin Wall without a war, the creation of a single
    European currency. Cold War rivalries, ideologic conflicts,
    North-South differences all created an international system
    that was defined by its divisions, not by its shared interests.
        ``The trend in today's international system is very
    different. All around us and across many issues, we feel more
    and more the need for global cooperation, multilateral
    agreements, and the international rule of law. The WTO's
    emergence as a leading rulemaker in the global economy is a
    powerful example of this trend, but is not alone. From human
    rights to climate change to capital flows, our globalizing
    world demands global solutions, and these solutions must be
    increasingly by shared agreements and rules.''
        What he means here is that the idea of a perfect world
    consists of a WTO paving the way for an order that is involved
    in everything from human rights, climate change, to capital
    flows. This is the type of agenda that I see as a problem. It
    suggests that WTO sees itself more than just trade dispute-
    resolution body, but an ideologic instrument, where it swings
    an economic hammer to impose a U.N.-driven, consensus-based
    ideology.
        Tying the economic well-being of the United States to its
    submission to international notions of right and wrong is the
    worst type of blackmail. We all remember when Libya was elected
    the chair of the U.N. Human Rights Commission only a couple of
    years after the United States had been kicked off the Human
    Rights Commission. Currently, Sudan, Zimbabwe, Cuba, and
    China--a literal Who's Who in human rights violators--are on
    that same commission. Is that the kind of consensus we want? I
    think not.
        WTO tentacles reach not only to Congress here in
    Washington, but to many State legislatures forced to change
    their laws in response to an adverse ruling. When an
    organization in Geneva requires a struggling entrepreneur in
    the middle of America to change how he does business or imposes
    new standards on entire industries, Congress cannot be derelict
    in exercising oversight. The balance between costs and benefits
    of U.S. participation in WTO must be constantly monitored. We
    need to tread carefully, because the WTO does carry a very big
    stick.
        Let me thank each of our witnesses for being here. Senator
    Carper was unable to attend. He will offer a statement for the
    record.
        We have before us today two panels. The first is James
    Mendenhall, Acting General Counsel for the Office of the United
    States Trade Representative. And we will have a second panel
    consisting of Claude Barfield, resident scholar, American
    Enterprise Institute; Dr. Robert Stumberg, professor of law,
    Harrison Institute for Public Law, Georgetown Law School; and
    Robert Vastine, president, Coalition of Service Industries.
        Mr. Mendenhall, first of all, thank you for being here. I
    want to say something and I want you to take it in the proper
    perspective. It is very difficult for me to prepare for this
    hearing when I get your testimony at 8 o'clock last night. That
    is when it was delivered to my office. And I know that is not
    necessarily your fault. But at every hearing, I want the
    message to go back through the OMB that we have to have more
    timely availability of testimonies with which to be prepared to
    conduct the hearing. So if you would do that.
        I thank you for your testimony. Your written testimony will
    be considered a part of the record, and I recognize you now.
    Thank you so much.

     TESTIMONY OF JAMES E. MENDENHALL,\1\ ACTING GENERAL COUNSEL,
            OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE

        Mr. Mendenhall. Thank you, Chairman Coburn.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Mendenhall with attachments
    appears in the Appendix on page 42.
    ---------------------------------------------------------------------------
        I appreciate the opportunity to speak to you today about
    the relationship between the United States and the WTO. It is
    obviously a critical issue for all of the reasons that you
    highlighted in your own statement.
        The specific title of today's hearing is ``Securing
    American Sovereignty.'' I would suggest an equally appropriate
    topic would be ``Securing American Economic Strength,'' for
    those two complementary objectives together form our guiding
    principles in negotiating and implementing the WTO agreements.
        U.S. participation in the WTO and the world trading system
    is absolutely critical to our continued economic growth. At the
    same time, the safeguards that are built into the system, which
    I will describe in my testimony, fully preserve our sovereign
    right to regulate as we--the U.S. Government, State and local
    governments, and the people of America to whom we answer--see
    fit.
        Since 1994, when the WTO agreements were completed, the
    United States has experienced an extraordinary period of
    economic growth. USTR's Annual Report, issued in May of this
    year, details those benefits at great length. Highlights also
    appear in my written testimony, and I won't go into the details
    of them here. But in summarize, they demonstrate dramatic
    increases over the past 10 years in production, productivity,
    incomes, and jobs throughout the United States.
        In short, the benefits of U.S. participation in the WTO are
    large, tangible, and widespread, as recognized by the House of
    Representatives last month when it voted overwhelmingly--338 to
    86--to defeat a resolution calling for U.S. withdrawal from the
    WTO.
        During the WTO negotiations--the Uruguay Round
    negotiations--and in the current round, U.S. trade negotiators
    have been ever mindful of the need to protect U.S. sovereignty.
    It is absolutely critical that at the same time we work to
    integrate the global economy and maximize opportunities for
    U.S. workers, farmers, and businesses, we fully preserve our
    sovereign prerogatives.
        To better explain how we have sought to achieve those
    objectives, I will break my testimony into three parts: First,
    a discussion of the substantive rules; second, a discussion of
    the administrative structure of the WTO; and third, a
    discussion of the landmark dispute settlement mechanism
    negotiated during the Uruguay Round, including a summary of how
    we have fared under that system.
        The predecessor to the WTO, the GATT, or General Agreement
    on Tariffs and Trade, lasted for about 50 years and covered
    only trade in goods. Since the negotiation of that agreement,
    though, the global economy has evolved and it now looks much
    different than it did 50 or 60 years ago. The services sector
    now accounts for 60 to 80 percent of the U.S. economy. It is
    the one area where the United States actually has a trade
    surplus. Protection of intellectual property has come to play a
    central role in U.S. economic growth. The value of innovation,
    creativity, and branding, covering everything from movies and
    music to software to pharmaceuticals to basic trademarks, is a
    key driver of U.S. competitiveness.
        As a result, we negotiated new rules in the Uruguay Round
    to cover services and intellectual property and break down
    trade barriers. We also modernized and elaborated on the old
    GATT disciplines, so that they now cover in greater detail
    issues such as standards, sanitary and phytosanitary measures,
    and trade remedies. Yet, all these rules share the same
    hallmarks as the previous GATT system. They set general
    parameters to eliminate protectionist measures and liberalize
    trade, while at the same time they allow ample flexibility to
    regulate in the public interest.
        Outside general guidelines prohibiting discrimination on
    the basis of nationality, promoting transparency and the like,
    the GATT and the GATS--the services agreement--impose few
    constraints on a country's ability to regulate as it sees fit.
    In the context of the GATS, a country may agree to open, for
    example, its markets to foreign firms seeking to provide legal
    and architectural services, but governments will retain their
    right to regulate admission, licensing, and disciplinary
    standards and the like.
        As another example, WTO rules require that governments base
    their food safety standards on science. At the same time,
    though, governments are free to adopt as high a standard of
    protection as they want, provided those standards are in fact
    science-based. The GATT and GATS also contain explicit
    exceptions for measures taken to protect health and safety,
    national security, and the like.
        When it comes to intellectual property, the rules we
    negotiated in the Uruguay Round codified, elaborated on, and
    made consistent 100 years of international practice and
    rulemaking, and at the end of the day, the agreement that we
    negotiated, the TRIPS agreement, effectively obligated other
    countries to meet standards that the United States by and large
    already met.
        But perhaps the most important safeguard with respect to
    the substantive rules is the way the United States, in
    accordance with our constitutional procedures, has chosen to
    implement them. The rules negotiated in the WTO, in and of
    themselves, have absolutely no domestic legal effect. Instead,
    the United States implemented the WTO agreements by statute,
    through the Uruguay Round Agreements Act. Any and all changes
    to U.S. law necessary to implement the WTO agreements are
    contained in that act and in subsequent amendments to U.S. law
    that the Congress may choose to adopt. If the Congress chooses
    not to amend a law that conflicts with a WTO rule, the domestic
    law prevails.
        Other protections are built into the statute as well. For
    example, there is no private cause of action that may be
    brought in U.S. Federal courts on the basis that a particular
    measure--State, local, Federal--is inconsistent with the WTO
    agreements. And State laws are given similar protection. The
    WTO agreements don't automatically preempt State laws, and the
    statute contains provisions establishing procedures for
    consultation between the Federal and State governments
    regarding implementation of the WTO rules, including when it
    comes to dispute settlement.
        Turning to the administration of the WTO, it is important
    to recognize that the WTO is a member-driven organization.
    There is a secretariat that administers the organization, which
    is based in Geneva, but it has virtually no independent
    decisionmaking ability. Decisions are generally taken by
    consensus, that is, by unanimous consent, which means that any
    member may, in theory, exercise a veto, including, of course,
    the United States. Now, countries with stronger economic and
    political clout--which of course includes the United States--
    can effectively use this threat to motivate other members to
    reach compromises that are acceptable to all.
        Special rules are spelled out in the WTO Agreement for
    taking particularly important decisions, such as amendments or
    binding interpretations. For example, core provisions on most
    favored nation treatment, the amendment process, the
    decisionmaking process--those rules may only be amended by
    consensus. No substantive amendment to the WTO agreements can
    apply to any member that doesn't agree to its application.
        Turning to dispute settlement: The dispute settlement
    system that existed under the GATT was overhauled during the
    Uruguay Round, and the new rules for dispute settlement are set
    forth in the Dispute Settlement Understanding, or DSU. The DSU
    is in turn administered by something called the Dispute
    Settlement Body, which is a subsidiary body to the WTO General
    Counsel.
        The Dispute Settlement Understanding, and the process that
    is set forth therein, provides a forum for resolving disputes
    over a member's compliance with the rules. But dispute
    settlement is only available to governments, not to private
    parties. Private parties can't go to the WTO and bring a claim
    against any other member, including the United States.
        The dispute settlement process begins with consultations,
    and if that fails to produce a resolution, the complaining
    member may submit the dispute to a formal panel for resolution.
    The panel is composed of three members chosen by the disputing
    parties, so there is party control over the process. And if no
    agreement is reached, the WTO director general will choose the
    members of the panel. The panel will then issue findings as to
    whether the responding member has acted inconsistently with its
    obligations. If such a finding is rendered, the panel may
    recommend that the member bring its measure into compliance.
        Either member may appeal the panel's decision to the
    appellate body, which is a standing body of seven members, one
    of which is from the United States. The appellate body will
    then issue its findings and correct errors in the report.
        The DSB will then automatically adopt the panel or
    appellate body report, unless it agrees by consensus not to do
    so--which effectively means that all reports are adopted. It is
    important, in fact critical, to recognize, however, that
    regardless of any decision that may be rendered by a panel or
    the appellate body, the WTO has absolutely no authority to
    require any member to change a law, regulation, or practice.
        If a member fails to bring its measure into compliance,
    there are other options available. It can offer compensation to
    the complaining member, which may mean, for example, that it
    lowers tariffs on imports from the complaining member. It
    doesn't have to do that. If it chooses not to offer
    compensation, or if no agreement on compensation is reached,
    the complaining member can retaliate, which means it can impose
    higher tariffs, for example, on imports from the member found
    to be acting inconsistently with the rules.
        But again, the WTO cannot force any member to change a law
    or regulation or practice. And if a country refuses to comply
    with a finding, it can't be forced to do so.
        In a sense, this is no different than what would happen if
    the WTO never existed in the first place. In such a world, any
    country could impose sanctions for whatever reason it deemed
    appropriate. There are, of course, significant differences,
    which are important. The complaining member, if it goes through
    the process and sanctions are its only alternative at the end
    of the day, it receives a stamp of approval from the WTO, and
    that is important from the perspective of the international
    community. And the international community may bring pressure
    to bear on the country that was found to be acting
    inconsistently with the WTO rules and try to persuade, on that
    basis, the member to bring its measures into compliance. But
    diplomatic pressure is vastly different from a system that
    could compel a government to comply. And again, the WTO cannot
    compel the United States or any other member to comply with a
    ruling.
        The United States has fared fairly well under this system.
    Since the start of the WTO, we have initiated 75 cases, of
    which we have settled 24, we have won 24, we lost four, and the
    remainder are in litigation or being monitored for progress or
    otherwise inactive. We have been challenged 84 times. As you
    noted, 52 of those cases have been completed, and of those we
    have settled 15 and won 12.
        The number of cases filed by the United States and all WTO
    members combined has declined over time, as countries in the
    beginning of the system, back when the WTO first began,
    essentially picked the low-hanging fruit and there was a pent-
    up demand that was exhausted during the first few years of the
    WTO. That, combined with the fact that the WTO dispute
    settlement system works to deter new breaches, has resulted in
    a gradual decline in cases over time, but there still is a
    steady stream of them, as there has been over the past few
    years.
        The system isn't perfect, and we recognize that, and part
    of the negotiations that are going on now are to improve the
    system. The United States has played a critical role, central
    role in that process. We have advocated, for example, increased
    transparency in the dispute settlement process by opening
    proceedings to the public, opening up the hearings,
    facilitating public access to documents, and urging members to
    consider establishing guidelines for accepting, for example,
    amicus curiae submissions so that members of civil society and
    others who wish to voice an opinion on the interpretation of
    the agreements may do so.
        We have also suggested that WTO members provide additional
    guidance to panels and the appellate body to help ensure that
    the process better serves its primary function of facilitating
    settlement of disputes rather than merely rendering legal
    decisions. And we have recommended the development of new
    mechanisms to improve flexibility and member control over the
    process.
        In conclusion, I return to where I began, that
    participation in the WTO has benefitted the United States
    tremendously. We recognize, however, that efforts to strengthen
    integration and open foreign markets for U.S. farmers, workers,
    and businesses must at all times be balanced with appropriate
    safeguards to protect our sovereignty. As in the past, we will
    continue to ensure that we preserve this balance as we continue
    with the current round of negotiations. Thank you.
        Senator Coburn. Thank you very much for your testimony. Let
    me ask a few questions of you, if I might.
        The people who actually make the decisions is from a list
    of what I understand is experts in the area. Is that right?
        Mr. Mendenhall. You are talking about dispute settlement
    panels?
        Senator Coburn. Yes.
        Mr. Mendenhall. That is right.
        Senator Coburn. Who are they? Where is the list? Who makes
    the list?
        Mr. Mendenhall. Right.
        Senator Coburn. Where do they come from? Where is the
    transparency to know who is making the decisions? Do we know
    who is--when the dispute settlement body is undergoing a
    decision, and there is this list of experts that they choose
    from, who makes the choice of who the experts are that see
    that; and does the general public, are they aware of who made
    the decisions?
        Mr. Mendenhall. Right. The particular panelists in a given
    case are chosen by agreement of the disputing parties--so the
    complaining member and the responding party. If they can't
    agree, then the WTO director general chooses the panelists in
    close consultation with the parties and others that have----
        Senator Coburn. Does that happen, in fact, often that they
    can't agree?
        Mr. Mendenhall. It does happen quite frequently that----
        Senator Coburn. Let's go behind that. Why is that? Because
    certain experts will rule one way and certain experts will be
    deemed to--thought to rule another way? Or we don't believe
    that they are experts?
        Mr. Mendenhall. Well, there may be concerns about a
    particular member having conflicts. There may be concerns about
    a particular panelist, or proposed panelist, who has rendered
    decisions that one of the disputing parties may not approve of;
    it doesn't agree with the approach that has been taken, and so
    on. So they have the ability to take that into account in
    deciding whether or not they would agree to a particular
    panelist.
        Senator Coburn. Is this all transparent? In other words,
    anybody anywhere in the world could find out who the list of
    experts are and who is the experts on each panel?
        Mr. Mendenhall. There is a roster that is maintained, which
    is included in our annual report. And that is available. It is
    available on our Web site--we publish it in hard copy as well.
        So, yes, the roster itself is publicly available. The
    particular panelists in a given case are, of course, known, as
    the ones who are presiding over the dispute are of course known
    as well.
        Senator Coburn. You say that WTO rules have no domestic
    legal effect. That is your testimony. Isn't it true to say that
    if the United States chose not to comply with these rulings,
    there will be serious implications about our trade relations?
        Mr. Mendenhall. I think it is fair to say that if any
    country doesn't comply, they will face pressure to comply. I
    think that is true. Now, at the same time, though, that doesn't
    mean that every country complies in every case. If there is a
    particular issue that is particularly sensitive for a member,
    that member may not comply. That has happened. The United
    States has not complied with several rulings that----
        Senator Coburn. Can you give me some examples of those?
        Mr. Mendenhall. We haven't complied yet with the Byrd
    Amendment, the finding against the Byrd Amendment. We haven't
    complied with the ruling against us on a particular
    intellectual property matter dealing with Irish music. By and
    large, we have complied, and we have sought to do so. But it is
    recognized that the Congress, if a law needs to be changed, has
    the final say on whether or not that law is changed, at the end
    of the day.
        Senator Coburn. I am sorry, I didn't hear the last thing
    you said.
        Mr. Mendenhall. There are times when the United States, as
    with other countries, has not complied with a given ruling. And
    it is recognized in the United States, as with all members,
    that the final say, if legislation needs to be changed, the
    final say on whether to do that lies with the legislature. So
    it lies with the Senate and the House of Representatives
    whether to implement or not, if a law needs to be changed.
        Senator Coburn. So the WTO allows countries to impose
    punitive damages and sanctions if a country does not come into
    compliance with a WTO ruling.
        Mr. Mendenhall. Right. They are not punitive. They are
    capped at the level of economic harm that the inconsistent
    measure has caused to the complaining member.
        Senator Coburn. Well, let's talk about France and beef,
    then. How did we get to the dollar amount that we got on
    hormone beef going into France?
        Mr. Mendenhall. We calculated--I don't know if we did
    France specifically, but we calculated the value of what our
    trade would have been absent the EC measure that was found to
    be inconsistent, and that was the level of retaliation that we
    were allowed to impose.
        Senator Coburn. OK. And so we collect that?
        Mr. Mendenhall. Yes.
        Senator Coburn. We collect a payment from them because they
    don't allow us----
        Mr. Mendenhall. We collect a payment by virtue of
    increasing our tariffs on certain imports from the European
    Community.
        Senator Coburn. Do you happen to know specifically what we
    responded to in terms of--we had a favorable ruling with the
    WTO on beef, and where did we increase tariffs?
        Mr. Mendenhall. That is a public list. I would be happy to
    provide it to you. I don't have the list in my head.
        Senator Coburn. Have we complied--other than the two you
    mentioned, all the other WTO rulings we have complied with?
        Mr. Mendenhall. We have complied with the vast majority. I
    would be happy to get you more information on the specifics of
    that. But we have complied with the vast majority.
        Senator Coburn. In your testimony you state WTO decisions
    are taken by consensus, which means that any member may, in
    theory, exercise a veto. Later in your record, you go on to
    state that any interpretation of the rules--that is, a type of
    WTO decision that involves binding trade rule interpretation--
    requires the agreement by three-quarters of all members.
        Mr. Mendenhall. Right.
        Senator Coburn. Can you explain the difference to me there?
    In other words, we can exercise a veto, but it can still be
    binding. How can it be binding?
        Mr. Mendenhall. Right. Interpretations, that is right. The
    interpretation rules are slightly different from the general
    rule. There is a general rule in the WTO that consensus is
    needed for decisionmaking. That is made explicit or reinforced
    elsewhere in the WTO agreements when it comes to particularly
    important procedures, such as the amendment procedure, such as
    particularly important substantive rules like
    nondiscrimination, MFN treatment, and the like.
        The interpretation procedures are a bit different. You are
    right, they require three-quarters, which I believe, although I
    would have to double-check it, was increased from--I believe it
    was increased from a majority in the GATT, although I would
    have to double-check that. So that is not consensus.
        Now, I can tell you as a matter of practice that there has
    never been a vote in the WTO. Members try extremely hard to
    only take decisions by consensus, regardless of what the rule
    written on paper may be. If we ever did go to a vote, it would
    be a landmark event, and we have never done that. In fact, on
    the interpretation procedure that you cite specifically, I
    don't believe it has ever been invoked since the beginning of
    the WTO. I don't think it has ever been invoked even in the
    GATT, although, again, I would have to double-check that
    history.
        So it is theoretically possibly to have a three-quarter
    vote on an interpretation--but practice is consensus.
    Interpretation, though, is vastly different than amendment. And
    the rules make clear that an interpretation cannot go beyond,
    cannot amend the rules and should not be used as such. And I
    think members are cognizant of that cautionary rule.
        Senator Coburn. Is it not a fact that rulings are not
    supposed to be precedent-setting, but in fact many times
    precedents are used to justify new rulings?
        Mr. Mendenhall. They are--you are correct that they are not
    formally precedent-setting. There is no formal rule of stare
    decisis in the WTO as there would be in a common law system,
    like the United States. At the same time, you are also right,
    and as I said, I think, in my written testimony, that panels
    and appellate bodies do look to previous decisions for
    guidance.
        Senator Coburn. Has that been harmful or helpful for the
    United States?
        Mr. Mendenhall. I think it is helpful--by and large, it is
    helpful for the United States and the system as a whole. It
    improves the stability, predictability of the system and helps
    ensure that people understand, countries understand how the
    rules will be interpreted and applied. So it has been helpful.
    Which isn't to say that every decision has been in our favor,
    or that we have agreed with every single finding that any panel
    and appellate body decision has rendered. But by and large, it
    has been helpful.
        Senator Coburn. I understand that the United States has
    proposed to the WTO body at least two resolutions that would
    modify the WTO's judicial system and allow for greater
    transparency and flexibility for disputing parties to work
    things out through bilateral negotiations. Can you tell me what
    the outcome of these resolutions are and if these were resisted
    or accepted by the WTO, and what are in the impact of these
    outcomes?
        Mr. Mendenhall. There is no outcome as of yet. Those
    negotiations are continuing. I think people are taking the
    proposals seriously. There is an interest by, certainly, a
    large number of countries in improving transparency and
    control. But those discussions are ongoing, so I can't tell you
    what the outcome will be.
        Senator Coburn. Can you educate me as to why somebody would
    be resistant to transparency at the WTO?
        Mr. Mendenhall. Sure. I don't think they should be, of
    course, but there are a lot of countries in the world--some
    countries in the world, anyway, that don't have domestic legal
    systems that operate in the same way as the United States
    system does, which is highly transparent. It is a concept that
    they aren't necessarily familiar with. They need to get used to
    the idea of opening up the court proceedings and opening up the
    submissions and so on.
        So in many cases, it is simply an education process more
    than anything else, that it is new and different, and there are
    some who may feel that, on top of that, that international
    proceedings of this sort should be between governments and not
    open.
        Now, the United States obviously disagrees strongly with
    that, and so we have pushed for greater transparency.
        Senator Coburn. One of the problems CAFTA is facing is the
    difficulty in Congress being informed prior to decisions being
    made and, to quote the chairman of the Agriculture Committee,
    is ``it is not going to happen again in terms of the lack of
    input. The complications over sugar could have been handled had
    the Congress been involved.''
        The other thing I spoke with Representative Portman about
    was enforcement of intellectual property rights. And it is my
    opinion--it may not be a correct opinion--that we lose all the
    time, even though people are ``in compliance,'' as China
    supposedly is in compliance. But then they don't carry out the
    effect of their own internal laws.
        How is the WTO helping us on the intellectual property?
    Because that is the only thing that we really have an advantage
    on today. And where are we going with that in terms of them
    enforcing? In fact China agrees with WTO rulings on
    intellectual property rights and yet they don't enforce the law
    in their own country, what are our options?
        Mr. Mendenhall. Right. Yes, I think we have an advantage in
    a lot of areas in addition to intellectual property--services,
    and certainly a lot of our manufacturing sector, and others.
    Agriculture is highly competitive. But obviously intellectual
    property is critical. It is a growing part of our economy. It
    is an area where we do have a very marked comparative
    advantage. And so we do need to do all we can to protect the
    value of our innovation and create incentives to continue
    innovation in the future.
        To determine what the benefit of the--let me break your
    question into two parts. One is the progress we have made so
    far, and then next steps, where we go from here.
        On the first part about where we are now and how we got
    there, I think it is important to look back where we were 10
    years ago, when the WTO was first put in place. At that point,
    a large number of countries in the world didn't have very
    developed laws on intellectual property, even apart from
    enforcement. We were in a sense in Phase I of the IP rulemaking
    world, where we just needed to put the rules into place so at
    least they had them on the books.
        We did that through the TRIPS agreement. There has been a
    dramatic improvement in the rules in the books around the
    world, including in China, but also in other countries as well.
    And we are continuing to ensure that happens when countries
    accede to the WTO, including Russia, for example. We are
    seeking to do that. The rules in the TRIPS agreement are by and
    large designed to improve the rules on the books.
        Enforcement is much harder. I call this Phase II, which is
    the challenge that is now facing us: How to develop enforcement
    rules that work. Because as you implied, you can have all the
    rules on the books that you want, but if you don't enforce
    them, they are not worth the paper they are written on. So we
    do need to focus now on enforcement. There are rules in the WTO
    on enforcement. Unfortunately, they aren't as precise as they
    could be. They say the enforcement procedures have to be
    deterrent, sufficiently severe to be deterrent. That standard,
    we all know, in some degrees is not met in countries like
    China, and we know that.
        What we are now in the process of doing on China is working
    closely with our industry to gather all the information that we
    can, and evidence that we can, and working closely with our
    trading partners and with their industries as well to gather
    all the information we can to demonstrate that we have tried
    the system, it has been tested, and it hasn't worked, and here
    is why it hasn't worked, and as a result we have 90 plus
    percent piracy rates in the country. We could then move forward
    and demonstrate that in fact there is an inconsistency.
        The WTO dispute settlement process--which a lot of folks
    are asking us to use and which we are willing to use if we are
    confident we can move forward successfully--it is a judicial
    process, or it is a quasi-judicial process, at least, and we
    need to prove our case. So even though we all know that it is a
    huge problem, we need to gather the evidence to do it. And that
    is a complicated process and that is a time-consuming process,
    but that is what we are doing. And we are working very closely
    with our industry to do it. And once we have gone down that
    road, if we have not seen a significant improvement in China,
    we have signaled quite strongly that we are willing to go
    forward and use all the options available to us in the WTO.
        In the meantime, we intend to use the procedures short of
    formal dispute settlement in the WTO to see what we can do to
    pressure China to move forward, including utilizing the
    transparency rules in the WTO that allow us to go to China and
    say give us all of your information on your cases so we can see
    exactly how your court system works and whether it has worked
    or not, whether it is effective or not. We are going to go
    forward with that. And we are working with our allies to see if
    they will join us in that effort.
        And then even outside the WTO process we are working
    through a formal bilateral dialogue with the Chinese, through
    the Joint Committee on Commerce and Trade, to improve IP
    enforcement in China, including setting benchmarks, setting
    standards, specific objectives that we would like them to meet.
    If we don't see dramatic improvement, then, as I said, all
    options remain on the table.
        Senator Coburn. I am trying to understand how the WTO helps
    us in intellectual property. You have the software
    manufacturers who are hesitant to go forward with a sanction
    against China, or a case, because they are being blackmailed,
    in essence, that if you do this, you are going to have worse
    problems participating in China.
        The very advantages that you list that we have are
    dependent--other than agriculture--on our intellectual
    properties, whether it is manufacturing techniques. We know
    things are reverse engineered in China, from patented items in
    this country, and then they are duplicated and the intellectual
    property is totally ignored.
        So how is WTO helping us at this time? Ten years from now
    may be too late for most of our software, most of our drugs,
    most of our copyrighted music and other things. Once that is
    gone down the road, then the advantages that we have in these
    other areas--manufacturing, service industries, and everything
    else. My question to you is why have we not filed through the
    WTO for an enforcement action on intellectual property in
    China? Are we afraid that we are not going to be able to
    continue the sales growth of our exports there through a
    blackmail process?
        I am having trouble understanding how the WTO is working
    effectively to control and protect American intellectual
    property. Even though we have the TRIPS agreement, if you have
    no enforcement, you have no law.
        Mr. Mendenhall. Right, I agree with everything that you
    said. It is absolutely critical that we act and we act quickly
    to address the problem of IP piracy and counterfeiting in
    China. I couldn't agree more. What we are doing now is trying
    to find the most effective way to do that. There are several
    tools that are available at our disposal, but they are not----
        Senator Coburn. What are they?
        Mr. Mendenhall. Well, I went through a number of them in my
    last statement. We have the ability to work with them
    bilaterally, which we are doing through the Joint Committee on
    Commerce and Trade, to address--to reach agreement on specific
    IP benchmarks and objectives for them to obtain. Now, we did it
    last year, and we did it just recently--last week, I believe,
    in China. They haven't fully met all of those objectives. We
    recognize that. But we are working with them closely----
        Senator Levin. May I just interrupt for one second? What is
    the ``it'' that you did? You said you did it recently.
        Mr. Mendenhall. The ``it'' is setting forth common
    objectives with the Chinese----
        Senator Levin. Proposing. Excuse my interruption, but be
    real clear. The ``it'' is proposing benchmarks. Is that what
    you are saying?
        Mr. Mendenhall. Proposing specific objectives, including
    significant reduction in piracy and counterfeiting.
        Senator Levin. Not achieving them, just proposing them.
        Mr. Mendenhall. We have reached with China agreement on
    obtaining a set--or reaching a set of objectives, including
    significant reduction in piracy and counterfeiting. Have they
    met those objectives, all of them? No, they have not. They have
    not significantly reduced piracy and counterfeiting to the
    level that we would wish them to do so. It is an ongoing
    process. We are continuing to work with them.
        But getting back to the question about what the tools are
    that are available and how we are utilizing them, this is one
    but not the only tool that we are utilizing. So we are using
    the Joint Committee on Commerce and Trade to enter into a
    serious bilateral dialogue with the Chinese to try to set forth
    a set of common agreed objectives that the Chinese should meet
    with respect to reducing piracy and counterfeiting.
        There is a general objective of significantly reducing
    piracy and counterfeiting in China as well as a series of
    specific objectives dealing with, for example, accession and
    implementation of the WIPO Internet treaties to bring their IP
    laws--to modernize them, allow them to address digital piracy
    online. We are also working on software procurement issues,
    working on a variety of other issues. We can provide more
    information on the specifics, if you would like.
        That is one tool. It is not the only tool. And it hasn't
    yet produced the dramatic and necessary results that we would
    like to see.
        So that is one tool. Another tool that we have is working
    through the WTO, and there are a number of procedures that are
    available to us on that front. One is working together with our
    allies through the TRIPS Council in the WTO, which is an IP
    forum, to bring pressure on the Chinese to--international
    pressure to bear on the Chinese to try to get them to comply.
    We have done that. Again, and I am not saying we have achieved
    all the goals we would like to achieve, but these are the tools
    available to us.
        Third, we are using the transparency procedures in the WTO
    to demand that China provide us information on why they
    believe, if they can put their money where their mouth is and
    prove to the world that in fact their system is effective in
    enforcing intellectual property.
        The last option available to us is dispute settlement, and
    that is an option that is certainly on the table. We have said
    to the Chinese that is a very serious possibility, and we are
    working closely with our industries, all segments of our
    industry who are interested in having us move forward on a
    case, to gather all the appropriate information, test the
    system, have a comprehensive program to make sure the system
    works in China. If it doesn't work, to provide the evidence to
    us so that we have a very compelling dossier of evidence that
    we can go to the WTO and say they failed in the following ways,
    their court system doesn't work, we have 90 percent piracy
    rates, or whatever rate it is that we are able to glean from
    the information that we are collecting, and prove our case in
    court, essentially, through the dispute settlement mechanism,
    that in fact the enforcement procedures are not deterrent.
        Those are all the options that we have available to us, and
    we are working hard. We are working to utilize all of them to
    maximize their potential and to ensure that they will actually
    succeed at the end of the day.
        Senator Coburn. I am going to defer to Senator Levin here
    in just a minute. Can you give us a time frame? In other words,
    the risk to U.S. intellectual property over a period of time
    not being enforced creates more and more damage to us as a
    Nation in terms of our future economic model. Because we really
    don't have a tool, or we refuse to use a tool to enforce this
    in China. How long can we wait until we bring them into
    compliance?
        Mr. Mendenhall. How long can we wait? Well, obviously we
    need to get them into compliance as soon as we can. That almost
    goes without saying. But we do need to be able to have all the
    evidence before us. Now, we have been working very hard over
    the past several years to gather what we can to demonstrate the
    case.
        And just to give you an example of what we have done, last
    year we submitted, or issued, a survey to all--an open survey
    to anyone who wanted to respond. We sent it to every Member of
    Congress, we put it up on the Web site, we sent it directly to
    companies, every company and trade association that came to us
    and said they have a problem with IP in China. We sent it to
    all of them, asking for information on the particular problems
    they have, how they have sought to enforce their rights,
    whether it worked, whether it didn't work, and so on. And we
    have done that. We conducted a special out-of-cycle review
    under our special 301 process--which is a tool I forgot to
    mention--to continue that process, gather additional
    information. We put China in a special category this year. We
    indicated that they are back on the priority watch list in
    addition to being under what we call Section 306 monitoring,
    which I can explain if you want. But they are in a category of
    their own, indicating that this is a matter of critical
    importance to us. We set out a work plan in that OCR and we are
    continuing to work with our industries now to gather any
    remaining information that we can.
        Now, obviously we need to move as quickly as possible. But
    we can't move unless we have all the information that we need.
    And to a large degree, it is up to our industries to work with
    us to do that. So we are in the process of doing it. I can't
    give you a precise timeframe, but we are working with all due
    haste to try to get it all together and be prepared to move
    forward, if that is where we need to be at the end of the day.
        Senator Coburn. All right. Thank you.
        Senator Levin, you are next for an opening statement and
    questions.

                   OPENING STATEMENT OF SENATOR LEVIN

        Senator Levin. Thank you, Mr. Chairman, most importantly
    for holding this hearing, and you are, it seems to me,
    performing an extraordinarily important function in terms of
    trying to weed out what is the wheat and what is the chaff when
    it comes to WTO.
        I must tell you, when it comes to trade enforcement, I have
    seen talk as a substitute for action for so many years around
    here that I am not surprised to hear more talk this morning.
    What does this mean, ``all due haste''? It sounds like ``all
    deliberate speed'' to me.
        Mr. Mendenhall. What I mean by that is we are----
        Senator Levin. The Chairman asked you for a timetable.
        Mr. Mendenhall. Right. And I gave the best I can give.
        Senator Levin. ``As quickly as possible.'' That is not a
    timetable.
        Mr. Mendenhall. Would you like me to respond?
        Senator Levin. Yes. I would love you to respond, but with a
    timetable. This year? Next year? This decade? I mean, China is
    absolutely not only continuing to close its country to our
    products, violating our intellectual property agreements,
    violating WTO, running up a huge trade surplus, manipulating
    currency, and what we hear is ``we're gathering evidence.'' You
    have told us they have not even complied with agreements, and
    that is true. You know it. You have said this again here. What
    more will it take, and when do you contemplate we are going to
    get to the WTO if they do not shape up--which they are not
    going to do. They will enter into an agreement and break it.
    When are we going to the WTO? Will it be this year? Do we have
    a commitment that you will go this year to WTO?
        Mr. Mendenhall. I can't give you a commitment. I can tell
    you that we are working extremely closely with our industries,
    all industries that are interested in bringing a case. And it
    depends in large part on their ability to pull together all the
    information that we are going to need. Now, I can't speak for
    industry and tell you when they are going to do that. But they
    are working on it. And I know they are working on it, so I
    don't mean this as a criticism of them. But it is in large part
    dependent upon them. And we are working with them to try to
    design a program to ensure that we get the information that we
    need. And that is the rate-limiting step here, if you will.
        Senator Levin. At the rate you are going, when will we file
    a case?
        Mr. Mendenhall. I am not sure what more I can add to what I
    have said already.
        Senator Levin. You talk a little too fast for me, I am
    sorry. Just a little slower on that. At the rate we are going,
    the current rate--you know what the rate is--gathering
    information, when will we be in a position to file a case?
        Mr. Mendenhall. I can't give you an answer to that. I can't
    foresee everything that is going to come up over the next few
    months. I don't know the answer to that. I can tell you we have
    pulled out all the stops to try to move this. It is one of our
    highest priorities to try to ensure that in fact we are moving
    forward on this.
        Senator Levin. Agreements have been violated. Is that
    correct? Did you not just say that again this morning? We have
    entered into agreements; they haven't lived up to them.
        Mr. Mendenhall. What I said was----
        Senator Levin. Is it true, they haven't lived up to our
    agreements that we have reached with them?
        Mr. Mendenhall. It is true that they have not significantly
    reduced piracy and counterfeiting to the levels we would like
    to see them to do so, that is correct.
        Senator Levin. Is it true that they have not lived up to
    agreements we have reached with them?
        Mr. Mendenhall. It is critical for us, if we are going to
    move forward in a dispute settlement case, that we be able to
    demonstrate it with all of the evidence as if this were a
    court. Now, we may all know it to be true intuitively, because
    we have all heard the horror stories, whether it be--largely
    anecdotal, but widespread anecdotal evidence that in fact there
    is a serious problem with IP enforcement in China. We know
    that. We know that it hurts small businesses, we know that it
    hurts large businesses. It is a top priority of this
    Administration to deal with this problem.
        However, knowing it intuitively is different from proving
    it in dispute settlement. I think we can--we will be able to
    prove it in dispute settlement, but we are in the process of
    gathering all the information we need to do that.
        Senator Levin. And when you say ``proving it,'' are you
    talking about proving violation of WTO or proving breach of
    agreements that we have already reached with China?
        Mr. Mendenhall. I was talking in the context of dispute
    settlement, but the same would be true otherwise, for any other
    reason.
        Senator Levin. You are talking about proof of both or proof
    of WTO violations? Is it agreements that have already been
    reached, or violation of WTO rules? Or both?
        Mr. Mendenhall. Well, I suppose it is both. But what I had
    in mind was WTO dispute settlement, since that was the context
    of our discussion.
        Senator Levin. OK, now, we have also entered into
    agreements with China. Is that not true?
        Mr. Mendenhall. We entered into an agreement in the mid-
    1990s on intellectual property enforcement. We reached common
    objectives last year, not as a formal agreement, but common
    objectives last year in the context of the JCCT, which provided
    further elaboration.
        Senator Levin. And the agreement that was reached on
    intellectual property in the mid-1990s, have they complied with
    that agreement?
        Mr. Mendenhall. That agreement is now 10 years old. Hard to
    say which of those commitments are now applicable and which are
    not. When the agreement was first reached, there was a
    significant reduction in export of pirated materials, which was
    a key objective. We have seen recently an increase in that. To
    say that they have definitively breached it or not, if you
    parse through that agreement, would be difficult to say.
    Clearly, though, if the overall objective of that agreement,
    under the TRIPS Agreement, is that they reduce piracy and
    counterfeiting to an acceptable level, they haven't done that.
    That is true.
        Senator Levin. Is part of the agreement that we have
    reached with China that they will comply with the WTO standard
    procedural norms, respond in writing to requests for
    information?
        Mr. Mendenhall. We are going to----
        Senator Levin. No, is that part of the agreement? Is that
    part of the WTO requirement, that they respond in writing to
    requests for information from other member countries?
        Mr. Mendenhall. They are supposed to do that, yes.
        Senator Levin. Have they?
        Mr. Mendenhall. We haven't made the request yet. We are
    doing that--well, let me--I don't know which specific provision
    you are talking about, but there are a couple of provisions
    that pertain to transparency. There is a process called the
    Transitional Review Mechanism developed under the TRIPS Council
    which is a review mechanism which is done periodically. IP is a
    prominent part of that. We have requested information, as have
    other countries. They have provided responses to those
    requests. There is a separate provision in the TRIPS agreement
    that allows countries to ask for specific information on
    specific cases. We are working with our industry on this
    request. They are happy with the results, with the working
    relationship we have, to put together that request, and we are
    working now with our trading partners to see if we can work
    jointly on that. We expect that request to go in soon. And then
    China will then have a period of time to respond thereafter.
        Senator Levin. The transitional review mechanism, is that
    called ``trim''?
        Mr. Mendenhall. T-R-M, yes.
        Senator Levin. It is called T-R-M. Have they abided by
    accepted WTO procedures relative to that transitional review
    mechanism?
        Mr. Mendenhall. Have they responded to questions?
        Senator Levin. Yes.
        Mr. Mendenhall. Yes, they have responded to questions.
        Senator Levin. So we don't have any cases where they have
    not responded to questions?
        Mr. Mendenhall. Not that I am aware of, although I can get
    back to you if there is a specific problem there.
        Senator Levin. And what does USTR mean when it says it is
    going to take more forceful action aimed at enforcing China's
    implementation of those WTO commitments? What do you mean when
    you say it?
        Mr. Mendenhall. I mean what I explained earlier. There are
    a number of procedures available in the WTO that are available
    to us.
        Senator Levin. Are there instances where China has not
    carried out its WTO commitments, in your judgment?
        Mr. Mendenhall. I think there is a very strong sense that
    there is a problem that they have on enforcement, that they
    have not lived up to the standard on enforcement in the WTO.
    Again, that is much different than saying we have all of the
    evidence that we need to gather to bring a case. Now, I think
    we can gather that evidence, but we are in the process of doing
    that now.
        Senator Levin. I am way over my time. Thank you, Mr.
    Chairman.
        Senator Coburn. I just have a couple more questions for
    you, if I might, and then we will be free.
        First of all, thank you for your candor. I understand you
    can't say something here that puts us in a limited negotiating
    position by what you testify here, and I understand that and I
    am appreciative of your position and recognize that.
        The National Conference of State Legislatures wrote to U.S.
    Trade Representative Rob Portman in March of this year and
    expressed concerns with the implications of WTO decisions on
    States rights, which are in fact major in many instances. What
    is the USTR doing to remedy the current problem of State
    lawmakers being out of the loop even though trade negotiations
    will affect their laws? In what stage of a trade dispute does
    USTR typically reach out to the States?
        Mr. Mendenhall. I will answer the latter question first and
    get back to the former.
        If there is a dispute that implicates State laws, we begin
    consultations immediately with the State, particularly the
    Attorney General's Office and others who have an interest in
    that. We did that, for example, in the gambling case, which
    prompted in part, I think, that letter. So we fully consult
    with the States who are implicated with any dispute all along
    the way. In fact, I think we are required to by statute, and we
    would do it anyway because it is absolutely critical that they
    be involved in the process throughout the time if any of their
    interests are implicated.
        So on dispute settlement, that is what we do. On
    negotiations, we have a similar process, where we have State
    points of contact that we work with in each individual State.
    We work with the Governor's Office. We of course have formal or
    informal dialogue with anybody, including State legislators,
    that individually or collectively want to ask us questions. We
    are happy to answer them at any time.
        But when we put forward negotiating positions, for example,
    as in the services context, that implicate State laws, we
    consult fully with the States on them. They have a chance to
    review the content of the submissions that we would make, the
    negotiating proposals we put down. They consent or not--in most
    cases they do. We work with professional associations,
    including State bar associations if we are talking about legal
    services, or whatever the appropriate association would be in a
    given case.
        So we have extensive contacts with the States at all times.
    And we will continue to do all we can to improve those lines of
    communication if a particular problem arises.
        Senator Coburn. Mr. Barfield is going to be on our second
    panel, and I read his testimony yesterday or the day before.
    And he seems to have some pretty good ideas or recommendations
    for us in terms of changing the WTO. I would consider it a
    personal favor if both you and Representative Portman would
    look at some of the recommendations in terms of--actually it is
    more in terms of transparency and solutions to problems that
    don't take us down some of these other paths. So I would
    consider it a great favor if you all would look at his
    testimony, because I found it very insightful.
        Do you have additional question, Mr. Levin?
        Senator Levin. I do. Thank you, Mr. Chairman, just a few.
        First, on the currency evaluation issue, Article 15 of the
    GATT prohibits WTO members from using currency exchange action
    to frustrate the intent of GATT. Has China manipulated their
    currency, in your judgment? Currency exchange?
        Mr. Mendenhall. My judgment isn't the determinative
    judgment.
        Senator Levin. I know that. But in your judgment, have
    they? I know it is not determinative.
        Mr. Mendenhall. I am going to have to defer to the Treasury
    Department on that.
        Senator Levin. Well, is it not true that the Treasury
    Department has said that current Chinese policies are highly
    distortionary and pose a risk to not just their economy but to
    trading partners and the global economic growth? Does that
    sound familiar?
        Mr. Mendenhall. I am assuming you are quoting a document.
    They could very well have said that. I would defer to them.
        Senator Levin. Do you accept that?
        Mr. Mendenhall. Again, on currency policy, I am going to
    have to defer to the Treasury Department.
        Senator Levin. Well, who challenges that policy at WTO?
        Mr. Mendenhall. Who challenges the policy?
        Senator Levin. Is that the Treasury Department, or you?
        Mr. Mendenhall. We would work in close consultation with
    the Treasury Department, as we do on all issues. We have an
    extensive interagency process on any matter that may implicate
    any agency's interest.
        Senator Levin. But who would actually file the document?
        Mr. Mendenhall. Yes, USTR would actually file it.
        Senator Levin. Are you considering filing such a case?
        Mr. Mendenhall. Well----
        Senator Levin. Given their finding and you work closely
    with them, are you considering filing that case?
        Mr. Mendenhall. I don't believe they found manipulation.
        Senator Levin. No, they found current policies are
    distortionary.
        Mr. Mendenhall. But they didn't find manipulation.
        Senator Levin. OK, so you are not prepared to file a case
    at this time?
        Mr. Mendenhall. It is not currently under consideration.
        Senator Levin. Would you be willing to file a case if you
    found manipulation?
        Mr. Mendenhall. If we found a violation of the WTO
    agreements, it would be something that we would always
    consider.
        Senator Levin. And if there is an artificial undervaluation
    of their currency through manipulation, would you file a case?
        Mr. Mendenhall. I can't commit to filing a case.
        Senator Levin. Even under that circumstance?
        Mr. Mendenhall. You are asking me a hypothetical question
    on whether we would bring a case if particular findings were
    made. I can't answer that question. It is a hypothetical
    question.
        Senator Levin. I think it is a very real question,
    actually. It is not hypothetical at all. If you can't say you
    would file a case if you find a violation of WTO, I don't know
    why you can't answer that case. Why isn't that ``of course you
    would''?
        Mr. Mendenhall. The question is whether or not the facts
    are out there to support----
        Senator Levin. No, I didn't. I said ``if you found''.
        Mr. Mendenhall. If we found it a violation of the WTO, it
    would be something that we would always consider. I can't speak
    definitively as to whether or not we would bring a case, since
    this is a request you are making to me in a hearing. I can't
    answer that.
        Senator Levin. OK. Just a couple of questions on auto
    policy. China's distribution registration system does not
    appear to allow for imports to be sold in China on a
    nondiscriminatory basis. For instance, China requires to sell
    cars in China you have to be a registered manufacturer in
    China. Is that legal under WTO?
        Mr. Mendenhall. If you are asking me specific questions
    about specific cases, we would be pleased to answer those in
    writing. So if you would like to ask me those questions, that
    would be fine. We will be happy to respond to them. The topic
    of the hearing was sovereignty.
        Senator Levin. It was--I am sorry?
        Mr. Mendenhall. Protecting American sovereignty. I would be
    happy to answer questions you may have in that regard. If you
    have questions on specific cases, specific potential cases, we
    would be happy to answer them, but I am not prepared today to
    talk in depth about potential cases.
        Senator Levin. Well, we talked about intellectual property.
    Was that American sovereignty?
        Mr. Mendenhall. I was trying to be as responsive as I could
    to the questions that you asked. I don't have all the facts
    available to answer all of the questions that you have on
    issues that are outside the topic.
        Senator Levin. I will just conclude, then, by asking you
    will you, for the record, review China's auto policy and report
    to the Subcommittee as to whether, in your judgment, there is
    violations of WTO involved in those policies?
        Mr. Mendenhall. I will certainly take that back and I will
    discuss it with my folks, and we would be happy to get back to
    you and discuss it with you.
        Senator Levin. As to whether you will do that, is that what
    you will get back to us? In other words, you are not going to
    commit to review the China auto policy and tell us whether in
    your judgment there are violations in that policy of WTO? Is
    that what you are--you are not committing to do that.
        Mr. Mendenhall. To tell you whether or not there is a
    violation?
        Senator Levin. In your judgment. What I am asking you to
    do, would you be willing to review China's auto policies and to
    report to this Subcommittee as to whether, in your judgment,
    those policies contain violations of WTO? Are you willing to
    make that commitment?
        Mr. Mendenhall. I am willing to look at it and see what is
    available, what the answer is.
        Senator Levin. Thank you, Mr. Chairman.
        Senator Coburn. Mr. Mendenhall, I am sorry we moved off of
    the subject. I know you did not come here prepared to answer a
    lot of questions on specific trade functions between us and
    China. So for that, thank you for being forbearing.
        One last question on our anti-gambling cases through the
    WTO, in terms of sovereignty. We won three of those, I believe,
    out of the four. The final outcome of the WTO ruling, there is
    a particular note because the first time the WTO cited a
    ``moral exception clause'' in its rules and said the United
    States had a moral right to restrict marketing access to
    gambling. Allowing the WTO to discern whether U.S. laws can
    stand on their moral basis if not their economic raises the WTO
    to a whole new level.
        Will other U.S. laws, such as child pornography bans, be
    subject to the same moral examination? What about Internet
    child pornography? And what if the WTO rules against us on
    that?
        Mr. Mendenhall. Sure.
        Senator Coburn. Using this moral definition. And I am going
    back to sovereignty, because we do have the right to do that.
        Mr. Mendenhall. Sure. Absolutely we do. And it is not the
    WTO's role to second-guess whether or not our standards of
    morality fit with any particular panel or appellate body or any
    other country's standards of morality. And they don't do that.
    It is up to each country to decide what its standards of
    morality are.
        The question that the WTO was trying to answer in the
    context of a specific exception that allows us an ``out'' to
    act inconsistently with the WTO for seeking to protect morality
    is whether or not the measures that we have adopted in fact
    achieve the ends that we have sought. So we set whatever
    standard of morality that we would like, whether it be gambling
    or pornography or what have you. And the WTO doesn't second-
    guess it. But what it looks to see is whether in fact the
    measures that we have sought to protect our moral values are
    truly designed to meet those goals or whether they are an
    arbitrary protectionist measure.
        They certainly would not second-guess child pornography and
    say that is something that ought to be permitted. They didn't
    say gambling is something that ought to be permitted. We are
    perfectly within our rights to say it is not.
        Senator Coburn. But their actual decisionmaking process
    makes a value judgment on whether or not we as a Nation have a
    right to set a certain moral standard and whether or not we
    were using that appropriately?
        Mr. Mendenhall. No. Sorry if I didn't explain myself
    properly. It is entirely up to the United States to decide what
    moral standard it seeks to achieve, and that is across the
    board, whether we are talking about pornography or gambling or
    what have you. They do not second-guess that.
        Senator Coburn. Well, if they are making an evaluation if
    we were using that properly, is that what you are saying, too?
    For example, let's talk about the gambling case. They
    obviously--three out of the four. There is some dispute whether
    we won all that or not. But three out of the four, if they
    could prove that our laws on Internet gambling were
    protectionist instead of we don't want Internet gambling, then
    its moral purpose is then presumed allowed, or not allowed? In
    other words, if it is their judgment that we did it from a
    protectionist standpoint instead of from a moral standpoint,
    and they rule against us, and they don't allow us to use the
    moral exception, then in fact they are making a judgment on our
    sovereign law. Is that not correct?
        Mr. Mendenhall. Let me respond to that in a couple of
    parts. The way they would analyze it is they would say--whether
    it is pornography or gambling of what have you, they would say
    the United States has authority, ability under the WTO rules to
    decide for itself whether or not to permit gambling, whether or
    not to allow child pornography, or any other moral value we
    would seek to vindicate. What they would then say is, is there
    a particular reason that you--the United States or another
    country is, for example, singling out foreigners and saying--
    what they said in the gambling case is we singled out for a
    particular type of Internet services, we had different rules
    for domestic and foreign operators. And the question is why
    would you do that? It is not that you can't prohibit gambling,
    or permit it, whatever you want to do, but why would you
    differentiate between the U.S. and foreign nationals? If truly
    you are trying to vindicate a moral value, why would you
    discriminate?
        That would be the question that they would ask. They
    wouldn't be questioning the underlying moral judgment that the
    United States put forward.
        Senator Coburn. Thank you very much. I appreciate your
    testimony and I would hope somebody from your staff will hang
    around to hear our second panel.
        Mr. Mendenhall. Thank you.
        Senator Levin. Just on the gambling issue, could I follow
    that up? What you are saying, then, is they are saying they are
    not going to interfere with our moral judgment, they want to
    make sure that it is applied equally to domestic and to foreign
    services, gambling services? Is that the heart of their
    judgment?
        Mr. Mendenhall. The way the exception is established is it
    says you can discriminate in certain--they realize that in some
    cases you may have to discriminate in order to vindicate
    whatever it is that you are trying to vindicate. But it can't
    be arbitrary. There would have to be a reason why you would
    need to discriminate between foreign and domestic individuals--
    --
        Senator Levin. Does that reason have to relate to the
    underlying moral purpose?
        Mr. Mendenhall. It would have to--yes. Well, it would have
    to--the discrimination that you would seek to be justifying,
    you would have to argue that in fact the discrimination was
    necessary to vindicate the moral value.
        Senator Levin. Thank you.
        Senator Coburn. Mr. Mendenhall, thank you so much for being
    here.
        Mr. Mendenhall. Thank you. I appreciate it.
        Senator Coburn. Panel number two will please come forward.
    We have Claude Barfield, resident scholar at the American
    Enterprise Institute; Robert Stumberg, professor of law,
    Harrison Institute for Public Law, Georgetown Law School; and
    J. Robert Vastine, president, Coalition of Service Industries.
        Mr. Barfield will begin our testimony. Your written
    testimony will be made a part of the record. If you could,
    limit your initial comments to 5 minutes.
        Mr. Barfield.

     TESTIMONY OF CLAUDE BARFIELD, PH.D.,\1\ RESIDENT SCHOLAR, AND
       DIRECTOR, SCIENCE AND TECHNOLOGY POLICY STUDIES, AMERICAN
                          ENTERPRISE INSTITUTE

        Mr. Barfield. Thank you very much for inviting me today.
    You have my written testimony, and so I am just going to hop,
    skip and jump around. I would like to make three preliminary
    points.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Barfield appears in the Appendix
    on page 54.
    ---------------------------------------------------------------------------
        One is that despite the criticisms that I level in my
    testimony about the dispute settlement system, I am a strong
    supporter of the World Trade Organization.
        Second--and we can come back to this--often, and I think
    sometimes this is true, the critics of the dispute settlement
    system, of them it is said that they are kind of sore losers,
    that they somehow represent interests that lost a case or some
    cases, for instance, of the anti-dumping case or whatever. I
    should say that in my own case I have this odd dysjunction. I
    am a very strong critic of the U.S. anti-dumping system, and
    yet I think the decisions that went against us are wrong. I
    think the FSC legislation was terrible, but I think the
    decision that went against us was also terrible. I think the
    Byrd amendment is a terrible piece of legislation, but it is in
    the Congress prerogative to pass bad pieces of legislation.
        So I do not come at this as someone who thinks just because
    he lost cases that we ought to change things. I am in favor of
    the outcome, I just did not like the way it----
        And then finally, I would say that in my own case, what my
    position represents today is a change of my own views about the
    WTO and how it works, and how it works particularly with
    national systems, with national democracies. I would say as
    late as 10 years ago, 5 years ago, in my judgment, when you
    looked at trade negotiations, more is better, and that is, the
    deeper you went, the farther you went, the better you are. I
    also thought that the Congress really was an organization of
    mischief, basically often represented protectionist groups, and
    that the Executive really was the place one had to look for
    salvation, as it were, in the trade area.
        I no longer think that. That is, I still think that
    Congress can do, in my judgment, make some bad judgments,
    whether it is Byrd or whatever, but I think the problem we face
    is that the international rules--and I will come back to this
    because this is really the theme of what I would be saying--
    really have a dramatic impact on the domestic priorities and
    the domestic rationale for individual nation-states, and
    particularly they have an impact, I think, and we have to look
    more and more in terms of impact on the legislative and the
    representative system of governments in individual nation-
    states I am talking about.
        Let me just go more specifically to the WTO, and to take
    you back to a history here. From the beginning of the GATT and
    then the WTO, there were two traditions that kind of were
    juxtaposed against each other. On the one hand, there were
    those who looked at the GATT as an inter-governmental
    organization that was an extension of diplomacy, and that if
    you had disagreements among nations, between nations, you ought
    to really try to handle it diplomatically, not really worry so
    much about legal principles or international law principles,
    but just do what you needed to do to settle the issue.
        Europeans tended at that time to have that view of the
    international trading system. The United States was always on
    the other side, and that is, given our highly legalistic
    society, we always pushed for strong legal rules, legal
    interpretations. And the old GATT, I think, was much more
    European, the new WTO is much more, I think, in what had been a
    traditional U.S. point of view. I guess in my own case I would
    say that in terms of the change, be careful what you wish for.
        And let me just go back to what happened with the move to
    WTO. Two things happened, and what I think was playing out are
    the unintended consequences--and any generation would have to
    go back and look at what you had done. Two things happened in
    the Uruguay Round. One, there was the creation of the WTO with
    a new, much more at least quasi-legal if not totally
    international legal system, international legal rules of trade.
    At the time you changed the way the system operated, and that
    is, you went from a system in which when you had a complaint
    under the GATT, you could not really get--you did not get a
    resolution in favor of the complainant unless you could get
    consensus from everyone. That is, a panel could rule, but the
    United States could overrule that.
        Now, the United States and other countries were quite
    restive with that system, and let me be very clear because of
    where I am coming out. It was the United States who pushed for
    this change, that you would go in another direction. So the
    system was changed actually in the WTO so that it went from
    where you had to have a consensus to reach a ruling, to where
    once a panel in the appellate body in the new WTO ruled, you
    had to have a consensus, in other words, unanimous virtually
    against that in order for that to change.
        At the same time we kept a system where--as you asked Mr.
    Mendenhall--in order to have new rules you had to have
    consensus, or if you had to interpret old rules, three-
    quarters. In other words, what we set up was a very efficient
    judicial system, and it continued a very inefficient
    rulemaking, as it were, or legislative system. In terms of the
    analogy in the United States, it is as if when the Supreme
    Court ruled--forget about, I am not talking about things about
    the first 10 amendments now--when it rules on an issue of
    commercial, or the Federal courts ruled, it was as if that
    ruling could only be overturned by the Congress if you had
    virtual unanimity in the House and Senate.
        Now, one other thing happened to complicate matters. In the
    Uruguay Round, for the first time--you had seen this before in
    other rounds--but really in the Uruguay Round, you had the
    construction and the implementation of rules that went far
    beyond the border and deep into the national regulatory
    systems, or at least in their potential of telecommunications,
    of financial services, of health and safety, in other words,
    issues would have been before counted as domestic issues, and
    in some ways still were domestic issues.
        And so you put up a fairly rigid new legal system, which
    would be very difficult to change, juxtaposed against a
    rulemaking system that you could not change, and the authority
    of the WTO going deep into matters that had been counted as
    matters of the nation-state. That I think is the problem that
    we face. I do not think that there is a conspiracy in the WTO
    or the panel----
        Senator Coburn. Let me get you to sum up, if you would,
    please.
        Mr. Barfield [continuing]. To go into or second guess
    national governments. But I think inevitably what has
    happened--and we can talk about this in individual cases and we
    could argue individual cases--what has happened is, is an all
    too human trait that if somebody asks you a question, there is
    the temptation always to answer it, even if, as it is widely
    known, that in many cases the rules that are negotiated by
    diplomats in the WTO are unclear, they are contradictory. They
    sometimes are in opposition to each other. And so there is the
    temptation when that happens to answer the question even though
    you cannot.
        I have suggested a variety of ways of fixing this. You
    could have some sort of blocking mechanism, whereas you have
    some minority, a substantial minority does not agree with the
    system, you block it until you can negotiate it out, or you
    could have--without getting technical in international legal
    terms, the panels in the appellate body invoke the doctrine of
    ``non liquet.'' In other words, what they would be--the Latin
    term means ``it is not clear,'' and to send it back to the
    negotiators. Or you could put in what we have flirted with in
    the United States, a so-called political issues doctrine, in
    which the panel would say, look--I would put the FSC to some
    degree in that--this is a volatile political issue that we are
    not comfortable in answering, and you should negotiate this
    yourselves, and not put it to a dispute settlement system.
        I will leave it there.
        Senator Coburn. Thank you. Mr. Stumberg, thank you for
    being here.

      TESTIMONY OF ROBERT STUMBERG,\1\ PROFESSOR OF LAW, HARRISON
       INSTITUTE FOR PUBLIC LAW, GEORGETOWN UNIVERSITY LAW CENTER

        Mr. Stumberg. Thank you very much for inviting me. Senator
    Levin, good morning.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Stumberg appears in the Appendix
    on page 59.
    ---------------------------------------------------------------------------
        I have provided a written statement with four points. Let
    me just frame those points and then spend the rest of my time
    responding to some of the questions you raised about the
    gambling case, Senator Coburn.
        My first point is that trade agreements have a
    constitutional character, and if, as Members of this
    Subcommittee, you are familiar with domestic constitutional
    debates about preemption or about privatization or about
    takings, you will quickly recognize these debates in the
    international context. You will see some of the same language
    in the actual text of trade rules, and you will see the same
    issues basically argued before the WTO and other fora.
        Trade agreements are constitutional in the sense that they
    are designed to limit governing authority, even in areas where
    discrimination against foreign goods or services is not an
    issue, and they are also constitutional in the sense that the
    rules are very general, even vague in the way they are
    formulated.
        My second point, which I will return to, is that a good
    case study to see all these things at work is the WTO's
    decision on Internet gambling.
        But before I return to the gambling issues, let me also
    mention that there has been a developing dialogue between USTR
    and State and local governments on the so-called sovereignty
    issues. USTR has made a number of very clear statements on its
    web page. You can view them there. I have spoken to a number of
    State and local officials who feel like the responses just are
    not attentive to their concerns. In other words, you have two
    groups that are coming from very different cultures and
    perspectives, and the kind of consultation that is necessary to
    avoid problems like the gambling case presented has really not
    taken hold yet.
        There is no traction yet in terms of any meaningful,
    Federal-State consultation, and that is really my fourth point.
    Congress can play an important role by creating a forum to
    encourage people to come together and have a public dialogue
    about such issues as you raised about the gambling case.
        So let me just spend the rest of my time making a few
    points that I think are responsive. Even when the United States
    wins a case, there is a lot you can learn from it. This is one
    of the very few cases on the services agreement, the General
    Agreement on Trade in Service (GATS). Mr. Vastine's coalition
    has worked very hard to GATS put in place in order to promote
    American exports of services abroad.economy.
        What the gambling case says to me is that making a
    commitment in a sector like gambling services is like hugging a
    porcupine; it can be done, but you have to do it very carefully
    if you do not want to get hurt.
        Among the lessons we have learned from that case are, first
    of all, as the WTO appellate body recognized, the U.S.'s
    commitment on gambling services, which was made back in 1993
    and 1994, was essentially a mistake. It was a mistake that
    could have been avoided had there been effective consultation
    between U.S. trade negotiators and the legions of State-level
    officials who regulate this industry on a day-to-day basis.
        Second, the GATS rule that the island Nation of Antigua
    used to challenge the United States was interpreted very
    expansively by the WTO appellate body. It is a rule called
    ``market access.'' What is interesting about that rule is that
    it has nothing to do with discrimination against foreign firms.
    It is a rule that has to do with whether or not governments at
    any level may impose quantitative limits such as licensing
    monopolies or a limited number of service providers or imposing
    a quota. The WTO ruled that in this case, a ban on Internet
    gambling amounted to a zero quota.
        That is a very controversial decision. You might say it is
    a bad decision. But that is the job of the Appellate Body, to
    interpret language that is so vague and open-ended. They did
    their job, and used the role to find the United States in
    violation.
        The U.S. Trade Representative (USTR) effectively defended
    the United States with respect to all but one measure, the
    Interstate Horse-Racing Act, which permits remote betting for
    horse races.
        What is interesting about the public morals exception, as
    interpreted by the WTO, is if the USTR persuaded the Appellate
    Body that there were public morals concerns that were specific
    to remote gambling. In the Internet gambling context, these
    include accessibility to children through the Internet or the
    potential for money laundering or other connections to
    organized crime through Internet financial transactions. But
    those rationales do not apply to the kind of economic
    regulation that State and local governments have in terms of
    creation of monopolies, tribal casino concessions, State
    lotteries, and other sorts of quantitative limits that are
    common in the United States.
        Finally, one of the most interesting things about the case
    is to anticipate the end game. If the Congress does not move
    expeditiously with respect to amending the Interstate Horse-
    Racing Act, the WTO dispute process provides sanctions that
    include alternatives even for a small country like Antigua,
    which I think has about 90,000 residents. It is a country which
    is obviously too small to have any meaningful options in terms
    of a trade sanction when it comes to imposing tariffs on
    imports from U.S. goods and services. We would not even notice.
    The academic literature suggests that Antigua will follow the
    lead from Brazil, which just this past week has published its
    blueprint for how it will apply sanctions in a cotton case
    which Brazil recently won against United States with respect to
    a number of commodity subsidies and export promotion credits
    for cotton exports.
        Even a tiny country like Antigua can decide to withdraw its
    trade commitments with respect to honoring U.S. intellectual
    property rights. And the list of property rights that Brazil
    used, and which Antigua can use as a model, include copyrights,
    trademarks, industrial designs, patents, and protection of
    undisclosed information. That is a significant sanction stick,
    and it raises important questions about how the United States
    should make its future GATS commitments.
        Senator Coburn. Thank you, Mr. Stumberg. Mr. Vastine, thank
    you.

    TESTIMONY OF ROBERT VASTINE,\1\ PRESIDENT, COALITION OF SERVICE
                               INDUSTRIES

        Mr. Vastine. Thank you very much. I am Bob Vastine,
    President of CSI. Under another hat, I am Chairman of the
    Inter-Agency International Trade Committee on Services, an
    official advisory body of the U.S. Government, created in the
    1974 Trade Act.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Vastine with attachments appears
    in the Appendix on page 63.
    ---------------------------------------------------------------------------
        I appreciate the opportunity to be here today. This is the
    first time I have had the pleasure of testifying to a committee
    of which I was once the staff director. Since Senator Levin has
    left the room, I'll confess I was a Republican staff director.
        I want to say that my testimony is mainly focused on U.S.
    commercial stake in the WTO, though I am going to try to ad lib
    about regulation.
        First of all I want to make the point that CSI's member
    companies include virtually every aspect of U.S. services,
    tradeable services. We operate in more than 100 countries. Our
    global sales are over 800 billion. We employ about 2.2 million
    people globally. These companies are absolutely committed to
    the WTO and to the Doha Round as the best means of obtaining
    global trade liberalization to expand their foreign markets and
    create more jobs here.
        U.S. services trade consists of two elements, cross-border
    trade and sales by U.S. foreign affiliates to foreigners. The
    total of this trade, cross-border and affiliate trade, is $740
    billion, more than the GDP of Canada. Cross-border trade, is
    like financial services that are traded electronically, but it
    also means trade conducted by people, people who travel, who
    come here to buy health services, who come here to buy
    education services. Every time a foreign student matriculates
    at a U.S. university, that is an export. We are very good at
    this. We are also very good at sending our experts, our
    lawyers, our accountants, our computer consultants, abroad to
    other countries to provide their services personally. All of
    this amounts to total cross-border exports, as I said, of $338
    billion, where we have a $50 billion annual surplus.
        We are also the most competitive country in sales from
    foreign affiliates, $402 billion in sales in 2002. By the way,
    since you are the Governmental Affairs Committee, responsible
    for oversight of our statistics programs, I would love to talk
    to somebody on this Subcommittee about needed changes in the
    government's programs for compiling these statistics. We are
    dealing with 2002 data. It is too old.
        As I said, we are committed to the WTO. CSI was created in
    1982 because there was at that time no mechanism, no legal
    framework, for conducting trade in services, for creating rules
    for free trade in services, and CSI had a great deal to do with
    the writing of the General Agreement on Trade and Services
    (GATS).
        We believe that GATS is essential, because, Senator, it is
    the only way we can obtain legally binding commitments as to
    the treatment of our foreign investments and our export
    industries. In order to invest millions, sometimes a billion or
    more dollars in a foreign affiliate, a U.S. company needs legal
    certainty. The best way to get that legal certainty under the
    WTO is commitments in the GATS which are legally binding and
    therefore subject to dispute settlement.
        So in spite of the flaws, the discussion we have had today
    about dispute settlement, it is really an essential part of the
    post-Uruguay Round world, and very important for our member
    companies. Achieving legally binding commitments subject to
    dispute settlement is very important.
        I am going to skip a lot of my text, and I wanted to tell
    you how the Doha Round is in crisis, and ask your help in
    dealing with that, but I want to talk a little bit about
    regulation from my standpoint as having observed closely, the
    trade negotiations process really since 1965.
        The U.S. Trade Regulation is acutely aware of the need to
    preserve the right to regulate federally, State and locally. We
    know that USTR is very aware of these State regulation issues,
    for example, insurance. Insurance is regulated State by State
    under the McCarron Act, there is no Federal regulator for
    insurance. There are State commissioners. There is no common
    standard of State regulation insurance. It is bad for U.S.
    insurance companies operating nationally. It is very bad as
    well for foreign insurance companies that have to operate with
    a 50-state regulatory system.
        Other countries have asked in the Doha Round that we change
    that system. We cannot change that system. We are not going to
    be able to change that system. We are not going to be able to
    override the States. The best we can do is try to urge on these
    commissioners the need to consult among themselves and create
    harmonious, sensible regulation. But for now the whole
    insurance industry is held back domestically and globally by
    this system of State regulation, which is not going to be
    changed by the WTO.
        The Federal system creates equally complex problems for the
    law profession, for the engineering profession, for the
    construction profession. So we are very aware that in the areas
    where State regulation--and it is a big piece of our services
    trade--prevails, we have problems.
        Now, in my experience, in no case has the United States
    obligated any State to regulatory rules that a State has not
    voluntarily accepted. We just made a new offer in the WTO. We
    revised our previous offer. That offer included some changes in
    regulation that States had voluntarily adopted in the last 2
    years. Before including those changes in our offer, the USTR
    went to every single one of those States and got their
    permission to do that. Now, that does not mean that the
    professor is not correct. I would say the greatest crying need
    right now in this era of when some State legislators are
    rebelling against the WTO--based often on hearsay, innuendo and
    frankly, wrong-headed stories about the evils of the WTO--the
    best thing USTR could do would be to beef up its state-wide
    operation. They need a former governor, a former noted head of
    assembly or Senate or the State legislature to come be a
    counselor to the USTR, to be at Portman's right hand, to be a
    main point of contact for the States, to call the 50 States
    Attorneys General, the Supreme Court Justices, etc.
        Senator Coburn. Let me get you to sum up, if you would.
        Mr. Vastine. So I think I have made my point. I think we do
    have an issue with State regulation. In my own experience, the
    USTR is extremely sensitive to the need not to tread on the
    States, but we need to do a lot more work with the States
    themselves.
        Thank you.
        Senator Coburn. Thank you.
        Mr. Vastine, you just said we need the legal certainty of
    the WTO, and let me bring a case to you: Zippo lighter. Total
    piracy, there is no legal certainty for them. There is no
    enforcement mechanism. There is no punitive action that is
    going to be taken against the Chinese because the Chinese did
    not enforce it.
        So tell me what the legal certainty is when you have laws
    that are not enforceable, or we will not through our own
    political benefit enforce the sanctions that are available to
    protect intellectual property or piracy. I do not know if you
    have read the article on that. The Chinese make three or four
    times the number of Zippo lighters than Zippo makes, and with
    Zippo's lifetime guarantee, they all started coming back in
    because they were junk. Here is an American company whose
    intellectual property--i.e., a quality product with its name
    brand on it--was pirated, and yet we have done nothing about
    that.
        So tell me what you mean by ``legal certainty.''
        Mr. Vastine. I will try to do that. It is difficult not to
    get caught in the China problem, which is a vast problem. But
    let me give you some background.
        We worked very closely with the USTR in writing the
    agreement with China, the bilateral agreement between China and
    the United States, which laid out most of the rules that China
    is now supposed to be implementing. And we worked very hard for
    PNTR passage in Congress because we felt that agreement was a
    very good agreement.
        Now, we have a large number of industries and companies
    that have been having adjustment problems working with the
    Chinese to get them to implement their agreements. I don't know
    anything about Zippo, so I can talk to you only----
        Senator Coburn. You know zippo about Zippo. [Laughter.]
        Mr. Vastine. Thank you. But I can talk to you about our
    service's experience. Some of these companies are software
    companies, and some are entertainment companies, and they are
    all acutely aware of the IPR problems. And we join them in
    bringing constant expressions of concern to bear on USTR and on
    the Commerce Department about these violations.
        Senator Coburn. Let me interrupt you for a minute. Is it
    not a fact that the software manufacturers chose not to push
    for enforcement of the very laws that the Chinese were
    violating in terms of intellectual property?
        Mr. Vastine. Well, that is what I am getting to. The
    decision to go to the WTO and file a case is a complex
    decision. It is a difficult decision for a company. We have
    companies in, say, express delivery who, on the one hand, are
    doing extremely well. Their sales in China have vastly
    increased. On the other hand, they have unfair competition with
    the local Chinese postal office, which is giving them a hard
    time in a number of ways.
        What does a company do in a situation like that? You have
    to put yourselves in the shoes of the company, and you can
    understand that they want to protect their position. They are
    doing well. On the other hand, they need to continue to argue
    for fair treatment vis-a-vis the China post or whatever entity
    may be in competition with them; the same thing in the
    insurance sector. It has taken years to get the insurance
    regulators in China to come around to beginning to implement
    their commitments in insurance services.
        Senator Coburn. Let me get you to answer my question.
        Mr. Vastine. So I am having a hard time answering your
    question.
        Senator Coburn. Is it true or not?
        Mr. Vastine. Is what true?
        Senator Coburn. That the software companies felt
    intimidated for their future market to not file a complaint.
        Mr. Vastine. I do not know that, Senator. I do not know the
    facts. I just do not know.
        Senator Coburn. Well, the problem I see with your
    statement, legal certainty, is there is no legal certainty when
    it comes to China. I am just talking about China. I am not
    talking about all of it because I know we have wonderful
    trading partners that do protect our intellectual property.
    But, in fact, if you have a system where the leverage is such
    that even if you have a legal remedy, the leverage is such by
    the country that is working it will not carry out the proper
    factors of that, you really have no legal certainty. We do not
    have that in terms of intellectual property.
        Mr. Vastine. There was a case--and maybe Mr. Barfield knows
    the case.
        Senator Coburn. Mr. Barfield----
        Mr. Vastine. We brought a dispute settlement case 6 months
    ago to the Chinese. We took it to Geneva. They settled
    immediately.
        Senator Coburn. Which case was that?
        Mr. Barfield. I do not know the case.
        Senator Coburn. Mr. Barfield, would you like to comment?
        Mr. Barfield. My only point is that I do not--the answer to
    your question is yes. But I do not think we can limit this to
    China. We can take up an issue that is about to maybe got to
    the WTO, very much, I am sure, on Congress' mind and the
    Administration's mind, and that is the Boeing-Airbus. For a
    decade, at least, the United States did not bring that case
    because the Boeing Company had reservations about what it would
    do with its markets in Europe, a sort of open secret. So I
    think you are right in terms of what is happening in China, but
    that is part of a calculation, as Mr. Vastine was saying. When
    you bring this case, a company or the government has to think,
    well, how does it fit with--this or any other case, how does it
    fit with our overall trade relations and, in some cases,
    diplomatic relations or security relations.
        We ought to admit that all of these things work as a piece
    of that decisionmaking process. But it is not just China. It is
    true with our other trading partners, too. It would be true
    probably with--we have relations with Brazil. We are
    calculating what we would do there.
        Senator Coburn. For example, the recent negotiations with
    Merck where they told them that they would reproduce the drug
    themselves unless Merck dropped the price.
        Mr. Barfield. That ended up--I think the U.S. Government
    did not get involved in it, but----
        Senator Coburn. No, we settled it.
        Mr. Barfield. Merck had to calculate what does this do
    about in this case Merck's overall international corporate
    strategies, and Merck decided that it would be better to fold
    on this. In other cases, if you take, let's say, the
    pharmaceutical companies in terms of Canada, for instance, and
    cross-border, they are holding the line. But these are--in each
    case----
        Senator Coburn. My point is there is no legal certainty.
        Mr. Barfield. That is true--well, the legal system is
    embedded in a larger political system.
        Senator Coburn. Right. So it is not a legal certainty
    because if, in fact, I make XYZ product and I have to make a
    way, not on a legal basis but on an economic basis, an
    international relations basis, diplomacy basis. So, in fact, we
    are to a position----
        Mr. Barfield. Well, legal----
        Senator Coburn [continuing]. Where the purposes of the WTO
    are good and long term maybe very positive. The real fact is
    there are a lot of other players, things that play into whether
    or not we get enforced trade law as to whether it is, and we
    turn a blind eye when it is not necessarily in our total
    national interest.
        Mr. Barfield. That is right. And I would hope--and I would
    agree with this or the Clinton Administration or whichever
    Administration it was that did it. The President has to look at
    this in terms of not just our trade policy but our total
    diplomatic and security----
        Senator Coburn. Let me come back to you. I asked Mr.
    Mendenhall this. How many years can we afford to continue to
    lose in the international markets the very intellectual
    property that Mr. Vastine represents through his service
    industry and continue to be able to compete?
        Mr. Barfield. Well, I actually think we could go for a long
    time, because I think actually what is happening is that other
    countries are kind of chasing their tail and we are--the aim
    that we--I think, as I would have said 10 years ago about Japan
    or others, I would look internally as to how we are handling
    our own innovation system. This is not to say that I do not
    think at some point the United States should not bring a set of
    cases on intellectual property. You were hammering Mr.
    Mendenhall correctly, but what he is dancing around is that the
    Administration basically thinks that if you look at our total
    relations with China, if you look at the way they are at least
    attempting to live up to their WTO obligations, which were far
    beyond the obligations that any other big country has ever
    undertake, just for membership, they figured--and this is true
    with the Europeans--we do not want to inundate the system. We
    could hammer the Chinese with a number of cases, but their
    worry has been--and maybe we are coming to the end of that--
    that this would really overload the system. If you really just
    sort of--a dozen cases against Chinese and, you could second-
    guess that or say that is an incorrect judgment. But I think
    that--he could not say this, but I would say it, that, yes,
    they are calculating a number of political things beyond just
    intellectual property and beyond trade. They are probably
    looking at Korea. They are looking at other things.
        Senator Coburn. Let me get back to sovereignty for a
    minute, our sovereignty as we have patent laws, we have
    internationally negotiated both through bilateral agreements
    and WTO the recognition of intellectual property and patent
    laws. Let's say I am Merck and I spend $1 billion a year
    researching HIV drugs. And then wherever I go around the world,
    because of our lack of trade sanction enforcement, all the
    companies say we are not going to allow you the return on
    investment to pay for the research that you had on this drug.
        Why is Merck in the future going to invest capital in
    research and the production of intellectual property if, in
    fact, they cannot get a return and we will not reinforce or
    enforce the very agreements that we have? Let me just
    background that for a minute. In this country, we pay 50
    percent more than anybody else in the world does for
    pharmaceuticals. Part of the reason is because we have not
    enforced our intellectual property rights because we have been
    blackmailed to say, well, we will just allow somebody else to
    make it under your patent and we will not honor your patent.
    And they know that will be a long fight, and it will come
    through WTO. But, in fact, we are being blackmailed.
        So, consequently, the American people are paying, they are
    subsidizing the rest of the world's pharmaceuticals through the
    prices they pay. We are getting ready to have Medicare D, which
    is going to, again, subsidize the rest of the world's
    pharmaceuticals, because we do not have a cogent trade policy
    because we have fixed in this overall parameter of things that
    maybe it is better for us not to.
        The costs of not recognizing that are weighing a tremendous
    burden on this country, and it is very short-sighted for us to
    not look at that.
        So the very consequences--and this gets back to the
    sovereignty of our intellectual property, i.e., the sovereignty
    of a patent of rationalizing that it is in our best short-term
    interest to not enforce it, but it ignores our long-term
    interest. Who is going to invest the capital in our drugs in
    the future if, in fact, our intellectual property is not done.
    And there you are challenging our own sovereignty because we
    undermine our sovereignty because we will not enforce it.
        Mr. Barfield. Well, I would say that, in general, whether
    it was--I could be bipartisan. I think it was the Clinton
    Administration and it is true with the Bush Administration. We
    are enforcing it in the big markets, and I think we will
    continue to do that, and I think we will back our companies--I
    hope we will back our companies, for instance, in the whole--I
    mean, you may be on the other side of this, the whole--the way
    they are reacting to parallel imports from Canada, because you
    have got to maintain the price structure. And, indeed, I fully
    agree with you that the proponents of just giving away all
    these pharmaceutical products in terms of let's take AIDS, the
    market signal you are giving to the pharmaceutical companies is
    do not invest in AIDS drugs because they are going to hammer
    us, we will not be able to get our return. And that is a
    terrible signal, and I think the Administration and previous
    Administrations have been cognizant of that.
        I think where it gets complicated is with--I do not know
    anything about Brazil, but with African countries, for
    instance, where there is no infrastructure and indeed the price
    is probably not the question. But you at least have to do
    something about that. The key to the answer--and we are off the
    subject, I think, of sovereignty. The key answer here is that
    we have got to enforce parallel import restrictions. It is
    perfectly good to allow our companies and encourage our
    companies to send drugs at much cheaper prices to lower
    economic developing countries in Africa, as long as those drugs
    don't come back to Sweden, because that is what will really
    kill Merck, that it is the developed country markets, and that
    I think is the answer.
        Senator Coburn. Well, but that subsidy--that is not a real
    market. What you are saying is we are going to allow, through
    the international----
        Mr. Barfield. No, we--Merck is producing at market rates.
    They are pricing for the world. If we undercut that--and the
    biggest way you would undercut that would be to have--we are
    not saying----
        Senator Coburn. We are not----
        Mr. Barfield [continuing]. To Merck you have got to send
    those drugs to Africa. They are not----
        Senator Coburn. We are pricing----
        Mr. Barfield [continuing]. Protecting Merck from----
        Senator Coburn. We are pricing for the United States and
    subsidizing the world with pharmaceuticals.
        Mr. Barfield. We have a worldwide pricing----
        Senator Coburn. Mr. Stumberg, do you agree with Mr. Vastine
    that the States are voluntarily changing laws, or are they
    feeling pressure to change laws?
        Mr. Stumberg. Probably neither, sir. Most State
    legislatures and State officials are not in the loop
    whatsoever. They are continuing to make their decisions like
    they used to. Some of them wake up in the morning, read the
    newspaper and are surprised to learn that a kind of law they
    have been making for years is now the subject of a trade
    dispute or at least it is being negotiated for the first time.
    I think that is perhaps a more realistic description of what is
    really going on.
        If you look at the U.S. schedule of GATS commitments, which
    is the progeny of the Coalition of Service Industries work in
    partnership with USTR over more than a decade, you will see
    that there are a number of specific sector commitments that
    represent the priorities of the United States in terms of those
    big markets.
        Within that big schedule, you will see that there are some
    States that are--I am using jargon here--listed as limits on
    U.S. commitments; in other words, some specific State laws are
    being carved out because USTR talked to those States.
        I will give you one example because Oklahoma is on the
    list, I believe. There are a number of States that have
    explicit limits on who may actually own land, including ranch
    land. By my count, there are 17 such States. USTR intended to
    carve out those States with respect to a GATS commitment on
    access to real estate for purposes of commercial wholesale and
    retail distribution services. There are only seven States
    listed on the U.S. schedule, which does not reflect the 17 that
    actually have these kind of laws, two of which are actually
    constitutional. I think Oklahoma and Nebraska are the ones that
    actually have constitutional provisions.
        Senator Coburn. This is corporate farming prohibitions.
        Mr. Stumberg. Right, exactly. I interviewed a number of
    lawyers who worked for Western State governors just to see
    whether these turn-of-the-century--the prior century--laws
    really were a priority of the governors, and somewhat to my
    surprise, the answer was ``yes.'' These are laws they want to
    safeguard.
        So I cite this just as an example that there sometimes is
    consultation. Even when there is an attempt at consultation, it
    is often incomplete because the process is so complex and so
    hurried. I think your point, Mr. Vastine, that USTR does not
    have the person power to effectively manage its relationships
    with States is well put. But I would go farther. I would say it
    is not just a matter of perhaps making a mistake with respect
    to reserving State authority about regulation of land use or
    ownership. And it is not just about making a mistake with
    respect to a gambling sector. It is a much deeper question of
    managing that complexity but at the same time appreciating that
    the bottom-up perspective of American federalism, which
    champions laboratories of democracy and local experimentation,
    is a very different and in some ways conflicting idea with the
    essential purpose of the WTO trade rules, which is to make for
    a more uniform set of rules by which the global economy can
    operate. Both are positive values----
        Mr. Vastine. And I think we have been accommodating them,
    and I hate to hear you say that there is some sort of effort to
    undermine the States.
        Mr. Stumberg. I did not say that there was an effort to
    undermine the States. I am saying that the system appears not
    to be working very well, and I have given you an example. The
    example is that in the context of gambling, where there appears
    not to have been effective consultation in 1993, which 10 years
    later led to a major trade dispute. That is the time frame--you
    have to plan your legal moves anticipating something that might
    happen in 10 or 15 years. Now we are on the cusp of another
    decision. Should the United States withdraw its commitment to
    gambling or not? That is a big strategy question in terms of
    the current round of GATS negotiations. Are Attorneys General
    being consulted by USTR with respect to the strategic tradeoffs
    on that very important decision? And according to the Attorneys
    General, just a month ago, the answer is ``no.''
        Senator Coburn. They are not being consulted.
        Mr. Stumberg. They are not.
        Senator Coburn. So are there specific recommendations other
    than the ombudsman position that Mr. Vastine--that you would
    make to the USTR in terms of how to make this more fluid,
    competent, and consistent with States so that we can negotiate
    reservations, if that need to be the case, for State positions?
        Mr. Stumberg. Well, let me start with something safe, and
    then venture out from there. The USTR's own advisory committee
    called IGPAC, the Inter-Governmental Policy Advisory Committee,
    which USTR appoints (these are hand-picked State and local
    officials), wrote a report this spring which called for much
    deeper and broader consultation with States. Their point was
    that USTR needs to be talking not to the governor's policy
    adviser for trade, who wears a lot of hats and is basically a
    political agent for the governor, but rather, the people in the
    State governments who actually make decisions about protecting
    State sovereignty: The lawyers in the Attorney General's office
    and people such as utility regulators, whoever is the relevant
    agency.
        That level of consultation has only occurred in rare
    circumstances, for example, insurance and accounting. It has
    not occurred across the board, and that leads to a second
    obvious need, which is capacity.
        But I would argue that while USTR is obviously understaffed
    to take on meaningful consultation with State and local
    governments, the real step forward will come when the State and
    local governments themselves organize in such a way that they
    can bring their issues to USTR, just like the Coalition of
    Service Industries brings its issues to USTR.
        You cannot make USTR big enough to handle a country as
    complex as the United States and its Federal system; rather, I
    think the movement has to come from the bottom up. But if you
    think about the role of Congress--and this is the final point
    in my testimony--Congress I think could play not only a
    catalytic role with hearings like the one you called today,
    Congress could provide a friendly forum, a neutral forum, where
    State officials and USTR are encouraged to come and have a
    public dialogue where it has not happened before. And the kind
    of close questioning that you showed earlier with respect to
    USTR and its China policy, if applied to American federalism,
    would open some eyes and help USTR understand that federalism
    is a priority in trade negotiations.
        Remember, the USTR's job description is set by the
    President of the United States and the Congress when you
    authorize negotiations every several years. If federalism is
    not spoken from either branch of government, then----
        Senator Coburn. You are referring to the fast-track
    legislation.
        Mr. Stumberg. I am.
        Senator Coburn. Thank you.
        Mr. Barfield, are you concerned that WTO may become a
    mechanism for political international activists, that we look
    at this--what can potentially come out of this gambling, like
    the Kyoto treaty or something like that? Is there a potential
    for it to move to a position where the implication of other
    policies outside trade implicate and influence trade decisions?
        Mr. Barfield. Yes, there is that possibility, and this is
    not sort of Henny Penny, the sky is falling, but let me walk
    you through the way another new character of the WTO beginning
    in 1995 was that in legal terms, without getting heavy into
    legalese, the WTO much more became a part of what is called
    public international law. And there are certainly legal
    scholars who argue that precepts of public international law
    now cover the WTO, that is, outside of trading rules.
        There are articles, for instance, in legal journals and
    some governments have commissioned pieces about, well, could we
    bring the United States to heel because they have not signed
    the Kyoto treaty through some Article 20----
        Senator Coburn. Would you be kind enough to reference those
    to the Subcommittee?
        Mr. Barfield. Sure.
        Senator Coburn. Thank you.
        Mr. Barfield. And other, the so-called morals clauses that
    Mr. Mendenhall talked about, the escape clauses, that is, that
    nations can implement particular--and then enforce them,
    particular policies and then try to enforce them with trade
    sanctions, so that there are also discussions about how human
    rights would come into the WTO.
        Now, let me be very careful here. That is something that I
    would hope that the Congress of the United States and other
    countries would be very careful to watch. The United States has
    to decide what it wants to do here. But to pick up on this
    discussion that was talking about State versus Federal, I think
    the same thing is true at the congressional level.
        The truth of the matter is I am in favor of fast track, but
    I have to say that I know the reasons from the trade side that
    is important. You are not going to get people to come to the
    table. That is what Mr. Vastine would say. It is what I have
    said. On the other hand, the truth of the matter is Congress in
    the Uruguay Round was presented with a mass of new rules,
    which, again, no conspiracy here, it was just impossible, even
    with much larger staffs than you had, much larger staffs than
    the government had, the implication which you could not
    particularly fathom, particularly, as I say, in services and
    health. This is all inside the border.
        The other thing is true that, again, when you look at the
    way negotiations are handled, USTR is being asked to make
    judgments about telecommunications policy or financial services
    policy. Now, they often depend on the other agencies, but these
    are issues that I think should be front and center with the
    Congress as it goes forward. And I say this as a supporter of
    the system. But these rules do have an impact on what we have
    counted as domestic issues. And we should be very careful--I am
    not suggesting that we should stick our head in the hole and
    say there are no international rules. But we need a better
    system of judging where you will give up--``you'' being the
    Congress--will give up authority to some international body,
    and you in speaking for the States will give up authority to
    some international body. And I think that system is
    increasingly, it seems to me, under challenge.
        As I say, it is the way of the world today that for a lot
    of reasons, because of globalism, there are a lot of people who
    are arguing for particular rules that we need across the board.
        Industry, by the way, just as you find in the Federal
    system of the United States, will at some point sometimes be
    tempted to say, gosh, instead of going to the States, 50
    States, let's go to the national government and settle it that
    way. You will find that same translation, I think, sooner or
    later--in the international level. Why do we have to deal with
    the rules of the United States versus the rules of the
    Europeans versus the rules of the Brazilians if you are--take
    the name of a company, if you are a multinational. But from the
    point of view of the elected representatives of United States
    democracy or the European Union evolution or Brazil or
    whatever, I think that ought to be a very much more careful
    process than we have had so far. And in my judgment, the
    dispute settlement system kind of adds to that.
        Mr. Mendenhall was not, I think, purposely being evasive or
    disingenuous when he said, yes, the Congress can--correctly,
    yes, the Congress--nobody can overturn the congressional rule.
    A WTO rule, the Congress does not have to agree to it.
        The problem with that is the way the system works. Your
    only alternative would be to withdraw from the WTO, and so you
    get these--you get a FSC case or another case, and it is kind
    of individual cases, none of which add up, in my judgment, to a
    decision the United States should pull out of the WTO. But your
    alternative is to swallow the case and say, all right, well,
    and we will negotiate it. And then the problem there is that
    once you have won a case in the WTO today, it is very difficult
    then to get somebody to go back and--if the European Union--
    they won on the FSC. Do you honestly think the European Union
    will go back and then negotiate a rule that allows us--it is
    just not in the cards for that to happen?
        Senator Coburn. So, in fact, there is significant impact.
        Mr. Barfield. Sure there is.
        Senator Coburn. Yes. Any other comments?
        Mr. Vastine. Senator, I cannot let you--well, you wanted to
    make the point about----
        Senator Coburn. I want to make a broader point, so go
    ahead.
        Mr. Vastine. I will make my broader point, too. Senator,
    our companies care deeply about obtaining legal commitments to
    the WTO. I cannot let the hearing end with you thinking that
    the Chinese accession and the membership in the WTO does not
    have legal value. We would not be discussing the potential for
    a dispute settlement process if it did not. At least China's
    accession gives us the ability to come to the Chinese in a
    number of forums and try to enforce our rights. It gives us
    rights to enforce which we did not have previously.
        So China's accession to the WTO and its membership there
    are very valuable. We are very lucky that the Chinese did it
    when they did and that leadership was willing to take the
    extraordinary bold step of subjecting that very rigid state-
    owned economy to market discipline. And it is a difficult
    process for them. It is a difficult process for us to adjust to
    globalizing the Chinese economy, but at least if they are in
    the WTO, at least we have these avenues to approach them.
        As to legal certainty, I hear your point. But our companies
    do believe----
        Senator Coburn. Those were your words, not mine.
        Mr. Vastine. I know.
        Senator Coburn. I was quoting back your words.
        Mr. Vastine. I accept that, and I stand by them. They do
    want the legal--they want it in writing. They want to see that,
    for example, the Saudis in the negotiation that is going on
    this very minute do not have the right to mandate sessions,
    insurance sessions to internal parties. I mean, we fight these
    agreements down to the last word.
        Senator Coburn. I recognize their value.
        Mr. Vastine. OK.
        Senator Coburn. But a right not exercised is a right not
    used----
        Mr. Vastine. And there are----
        Senator Coburn [continuing]. And a right not used is a
    right lost. And when we choose in the short term, on a short-
    term economic model--and that is the whole question. The real
    thing that is in front of Congress that is worrying us about
    the Chinese, just to be--it is not that we are not sitting up
    and that we are not progressing. It is will we progress to the
    place where they are a legal, aboveboard player in time to save
    our own economy.
        Mr. Vastine. Yes.
        Senator Coburn. And that is the real question in front of
    the Members of the Senate and the Members of the House. They
    are not playing by the rules now, period. Even though they are
    in the structure and on the team, they are like the bully that
    does not play by the rules. They go behind the barn and change
    the rules and then come out. And that is on intellectual
    property. That is on reverse engineering. And it is happening
    routinely.
        Now, maybe it is less. Maybe it is not. And the Congress is
    for them being a part of that. That is not the issue. The issue
    is whether or not you use the tools that they have agreed to to
    enforce the very outcome rather than make a short-term
    situation that we are better off now for our business, but we
    lose the business in the long term.
        So it is about a short-term view versus a long-term view. I
    just happen to think that we ought to be thinking about the
    long term. And it ought to cost them something now for
    stealing. And that is what it is. It is theft of intellectual
    property and future for the companies of the United States.
        Mr. Vastine. It is infuriating.
        Senator Coburn. I want to thank you each for being here. We
    have gone over our time. I appreciate you waiting for the long
    time that we had Mr. Mendenhall. And I thank you for your
    contribution.
        We will have some questions, and, Mr. Barfield, if you
    would give us those references, I would very much appreciate
    it.
        Thank you all very much. The hearing is adjourned.
        [Whereupon, at 11:33 a.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

                      PREPARED STATEMENT OF SENATOR CARPER

        I would like to thank our witnesses for being here today to discuss
    the important role that the World Trade Organization plays in
    arbitrating and enforcing international trade rules and agreements.
    This work protects American businesses' access to foreign markets and
    ensures that foreign producers do not engage in unfair trade practices
    in the United States, such as dumping, that can undermine our domestic
    goods and service providers. This is the very essence of free trade.
        We, in the Senate, recently passed the Central America Free Trade
    Agreement in an effort to liberalize trade with Central American
    countries and in doing so promote reform in these developing nations.
    In fact bilateral agreements, particularly with developing countries,
    provide us an essential tool to press for such change. But we often
    overlook the role that the World Trade Organization plays in laying the
    necessary groundwork for our bilateral trade agreements.
        One hundred and forty-eight countries currently belong to the World
    Trade Organization and close to thirty countries are seeking admission.
    To gain entry, these countries must negotiate bilateral agreements with
    other World Trade Organization members, leading to specific
    commitments--such as judicial reforms, government transparency, patent
    protections, labor and environment standards, etc.
        The United States is currently negotiating bilateral trade
    agreements with several countries seeking membership in the World Trade
    Organization, including Russia, Ukraine, and Saudi Arabia. In these
    bilateral agreements and through the World Trade Organization we hope
    to secure the enforcement of intellectual property rights, tax reforms,
    improving food health and safety standards, and more.
        The World Trade Organization also provides the only multilateral
    dispute settlement mechanism for international trade. In fact, this is
    an important tool that the Bush Administration has not used
    proactively. Whereas the Clinton Administration brought an average of
    11 cases per year in World Trade Organization, the Bush Administration
    has filed only 12 in their first 4 years. We are not adequately using
    this important resource to protect our nation's businesses.
        I look forward to hearing from the witnesses today and discussing
    ways to better use the World Trade Organization and the ongoing Doha
    Round negotiations to encourage reforms in developing nations and to
    even the playing field for American goods and services both at home and
    abroad.

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