[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



                    U.S. GOVERNMENT PRINTING OFFICE
23-160                      WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

        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.

[GRAPHIC] [TIFF OMITTED] T3160.001

[GRAPHIC] [TIFF OMITTED] T3160.002

[GRAPHIC] [TIFF OMITTED] T3160.003

[GRAPHIC] [TIFF OMITTED] T3160.004

[GRAPHIC] [TIFF OMITTED] T3160.005

[GRAPHIC] [TIFF OMITTED] T3160.006

[GRAPHIC] [TIFF OMITTED] T3160.007

[GRAPHIC] [TIFF OMITTED] T3160.008

[GRAPHIC] [TIFF OMITTED] T3160.009

[GRAPHIC] [TIFF OMITTED] T3160.010

[GRAPHIC] [TIFF OMITTED] T3160.011

[GRAPHIC] [TIFF OMITTED] T3160.012

[GRAPHIC] [TIFF OMITTED] T3160.013

[GRAPHIC] [TIFF OMITTED] T3160.014

[GRAPHIC] [TIFF OMITTED] T3160.015

[GRAPHIC] [TIFF OMITTED] T3160.016

[GRAPHIC] [TIFF OMITTED] T3160.017

[GRAPHIC] [TIFF OMITTED] T3160.018

[GRAPHIC] [TIFF OMITTED] T3160.019

[GRAPHIC] [TIFF OMITTED] T3160.020

[GRAPHIC] [TIFF OMITTED] T3160.021

[GRAPHIC] [TIFF OMITTED] T3160.022

[GRAPHIC] [TIFF OMITTED] T3160.023

[GRAPHIC] [TIFF OMITTED] T3160.024

[GRAPHIC] [TIFF OMITTED] T3160.025

[GRAPHIC] [TIFF OMITTED] T3160.026

[GRAPHIC] [TIFF OMITTED] T3160.027

[GRAPHIC] [TIFF OMITTED] T3160.028

[GRAPHIC] [TIFF OMITTED] T3160.029

[GRAPHIC] [TIFF OMITTED] T3160.030

[GRAPHIC] [TIFF OMITTED] T3160.031

                                 
