[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                 NAFTA AT TWENTY: ACCOMPLISHMENTS, 
                  CHALLENGES, AND THE WAY FORWARD

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         THE WESTERN HEMISPHERE

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 15, 2014

                               __________

                           Serial No. 113-112

                               __________

        Printed for the use of the Committee on Foreign Affairs


Available via the World Wide Web: http://www.foreignaffairs.house.gov/ 
                                  or 
                       http://www.gpo.gov/fdsys/





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                                 ______
                      COMMITTEE ON FOREIGN AFFAIRS

                 EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey     ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida         ENI F.H. FALEOMAVAEGA, American 
DANA ROHRABACHER, California             Samoa
STEVE CHABOT, Ohio                   BRAD SHERMAN, California
JOE WILSON, South Carolina           GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas             ALBIO SIRES, New Jersey
TED POE, Texas                       GERALD E. CONNOLLY, Virginia
MATT SALMON, Arizona                 THEODORE E. DEUTCH, Florida
TOM MARINO, Pennsylvania             BRIAN HIGGINS, New York
JEFF DUNCAN, South Carolina          KAREN BASS, California
ADAM KINZINGER, Illinois             WILLIAM KEATING, Massachusetts
MO BROOKS, Alabama                   DAVID CICILLINE, Rhode Island
TOM COTTON, Arkansas                 ALAN GRAYSON, Florida
PAUL COOK, California                JUAN VARGAS, California
GEORGE HOLDING, North Carolina       BRADLEY S. SCHNEIDER, Illinois
RANDY K. WEBER SR., Texas            JOSEPH P. KENNEDY III, 
SCOTT PERRY, Pennsylvania                Massachusetts
STEVE STOCKMAN, Texas                AMI BERA, California
RON DeSANTIS, Florida                ALAN S. LOWENTHAL, California
TREY RADEL, Florida                  GRACE MENG, New York
DOUG COLLINS, Georgia                LOIS FRANKEL, Florida
MARK MEADOWS, North Carolina         TULSI GABBARD, Hawaii
TED S. YOHO, Florida                 JOAQUIN CASTRO, Texas
LUKE MESSER, Indiana

     Amy Porter, Chief of Staff      Thomas Sheehy, Staff Director

               Jason Steinbaum, Democratic Staff Director
                                 ------                                

                 Subcommittee on the Western Hemisphere

                     MATT SALMON, Arizona, Chairman
CHRISTOPHER H. SMITH, New Jersey     ALBIO SIRES, New Jersey
ILEANA ROS-LEHTINEN, Florida         GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas             ENI F.H. FALEOMAVAEGA, American 
JEFF DUNCAN, South Carolina              Samoa
RON DeSANTIS, Florida                THEODORE E. DEUTCH, Florida
TREY RADEL, Florida                  ALAN GRAYSON, Florida
                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

The Honorable Carla A. Hills, chairman and chief executive 
  officer, Hills & Company International Consultants.............     8
The Honorable David Dreier, chairman, Annenberg-Dreier Commission 
  at Sunnylands..................................................    15
Mr. Eric Farnsworth, vice president, Council of the Americas and 
  Americas Society...............................................    30
Mr. Mark T. Elliot, executive vice president, Global Intellectual 
  Property Center, U.S. Chamber of Commerce......................    38
Duncan Wood, Ph.D., director, Mexico Institute, Woodrow Wilson 
  International Center for Scholars..............................    49

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Carla A. Hills: Prepared statement.................    10
The Honorable David Dreier: Prepared statement...................    18
Mr. Eric Farnsworth: Prepared statement..........................    33
Mr. Mark T. Elliot: Prepared statement...........................    40
Duncan Wood, Ph.D.: Prepared statement...........................    51

                                APPENDIX

Hearing notice...................................................    62
Hearing minutes..................................................    63
The Honorable Matt Salmon, a Representative in Congress from the 
  State of Arizona, and chairman, Subcommittee on the Western 
  Hemisphere: Material submitted for the record..................    64


   NAFTA AT TWENTY: ACCOMPLISHMENTS, CHALLENGES, AND THE WAY FORWARD

                              ----------                              


                      WEDNESDAY, JANUARY 15, 2014

                       House of Representatives,

                Subcommittee on the Western Hemisphere,

                     Committee on Foreign Affairs,

                            Washington, DC.

    The subcommittee met, pursuant to notice, at 2:36 p.m., in 
room 2172, Rayburn House Office Building, Hon. Matt Salmon 
(chairman of the subcommittee) presiding.
    Mr. Salmon. A quorum being present, the subcommittee will 
come to order.
    I will start by recognizing myself and the ranking member 
to present our opening statements. And without objection, the 
members of the subcommittee can submit their opening remarks 
for the record.
    Now I yield myself as much time as I may consume to present 
my opening statement.
    Good afternoon, and welcome to this hearing to evaluate the 
North American Free Trade Agreement. About 20 years ago, we 
passed this I think wonderful piece of legislation and entered 
into this agreement, and just last month, the subcommittee held 
a hearing in my home State of Arizona on our commercial 
relationship with Mexico and what we can do to better 
facilitate the flow of commerce along our southern border.
    So today's hearing on NAFTA is an appropriate follow up to 
that hearing, this time looking more broadly at our trade and 
investment relationships with both Canada and Mexico, the 
strengths and the weaknesses of NAFTA with 20 years behind us, 
and what needs to be done now to improve upon this agreement.
    I want to thank Chairman Royce for his leadership. I 
believe he will be joining us at the hearing today. We had a 
little vote that interrupted everything on the floor. I 
apologize to our panelists.
    Mr. Dreier. On the rule, I noticed.
    Mr. Salmon. On the rule, yes, and you know how important 
that is, the former Rules chairman.
    It seems clear to me that America's leadership in promoting 
free trade policies has been a vital part of American 
prosperity. The level of competition created by free trade 
policies has been the impetus for remarkable innovation. While 
leading to the opening of exciting new markets around the 
world, at home this has allowed the American people to access 
more varied goods and services at lower prices, while creating 
jobs, a practical and positive effect for free trade that 
benefits every American.
    American leadership in promoting free trade agreements 
globally has been instrumental in the spread of economic 
freedom and the rule of law worldwide and has spurred 
unprecedented economic growth in the developing world. Indeed, 
free trade has proven to be the most important tool of U.S. 
foreign policy seeking to promote individual liberty and 
economic freedom around the world. The world isn't entirely 
free yet, but the message of economic freedom and the power of 
entrepreneurship is being spread to far away corners of the 
globe thanks to American leadership and free trade.
    Twenty years ago, NAFTA was a truly groundbreaking 
agreement, becoming the first regional trade agreement between 
two developed countries and a developing country.
    There was a lot of controversy surrounding NAFTA then, and 
even today, it would be misleading to conclude that NAFTA was a 
perfect agreement. No trade agreement ever is. What it did do, 
though, was to integrate the U.S., Canadian, and Mexican 
economies, resulting in what today is a $19 trillion regional 
market.
    Indeed, figures from the United States Chamber of Commerce 
suggest that a combined total of 14 million U.S. jobs depend on 
trade with Mexico and Canada. Canada is the United States' 
largest export market and our most important supplier of 
energy. Meanwhile, it is worth noting that Mexico imports more 
U.S. goods than all of Latin America combined and more than 
Brazil, China, India, and Russia combined.
    NAFTA reduced and eventually eliminated trade barriers, 
leading to a generation of impressive growth in trade and 
investment among the three countries. This resulted in 
production sharing made possible by proximity between the three 
economies by integrating and strengthening supply chains in key 
industries. What this means for the United States is that 
imports from Mexico contain 40 percent U.S. content and imports 
from Canada contain 25 percent U.S. content. By way of 
comparison, imports from China contain only 4 percent U.S. 
content.
    Despite the reassuring promising numbers, we will likely 
hear from some of our witnesses, now that NAFTA is 20 years old 
and all grown up, we have an obligation to take a critical look 
at the agreement and find ways to make it even better.
    I have always been a firm believer in free trade and 
positive effects of truly free trade. That is exactly why right 
now, as negotiations are underway to liberalize trade through 
Transatlantic Trade and Investment Partnership, TTIP, and the 
Trans-Pacific Partnership, TPP, is exactly the right time to 
look at NAFTA, figure out where it helped U.S. businesses and 
commercial interests and the interests of American consumers 
and families, and where the agreement may have failed us.
    As we learned during our field hearing on trade 
facilitation with Mexico, 20 years into NAFTA should be the 
time we recommit our resources to border infrastructure by 
identifying new approaches to financing and commercial 
partnerships so we can make the investments necessary to make 
cross-border commerce more efficient and streamlined without 
neglecting legitimate security concerns. The U.S. should 
partner with and press Mexico to continue addressing the 
insecurity that plagues Mexico while reforming and updating its 
judicial system.
    While NAFTA certainly improved our commercial relationship 
with both Canada and Mexico, the treaty needs to be able to 
address 21st century trade challenges. One of these challenges 
is intellectual property rights protection issues that persist 
with our Canadian neighbors. In 2013, the USTR designated 
Canada as a watch list country on its special 301 report. This 
is a pending issue between our Nations, and I hope we can 
resolve it soon to ensure that individuals and companies have 
transparent legal avenues to ensure ownership and profits for 
their innovations.
    Further, it is important to note that there is only 
political support for these trade and investment agreements as 
long as people follow the rules, and the rights of innovators 
and investors are protected. It is notable that the North 
American energy independence and security was conspicuously 
absent from original NAFTA negotiations. At the time, Mexico 
had a constitutionally closed energy regime, making its 
inclusion impossible.
    Today Mexico is engaged in implementing serious energy 
reform that will open its energy sector to foreign investment 
through a constitutional amendment they are--in fact, they 
recently passed, promising to increase Mexican oil production 
and make North American energy independence a reality.
    Sadly, today, the roadblock to realizing energy security 
and independence in North America has been put up by the Obama 
administration right here in the United States. I once again 
call on the administration to finally approve the Keystone XL 
pipeline, which would be a job creator and an important part of 
our energy security for this country. Continued obstruction not 
only threatens the environment as less secure modes of 
transportation are utilized, but it sends a negative message to 
our Canadian partners and allies.
    I want to thank Ambassador Carla Hills and my friend former 
Congressman David Dreier for testifying on our first panel, and 
Mr. Eric Farnsworth, Mark Elliot, and Dr. Duncan Wood for 
joining us on the second panel to discuss the North American 
Free Trade Agreement, the accomplishments, the challenges, and 
the way forward.
    I look forward to a productive hearing.
    I would now recognize the chairman of the full committee if 
that is all right with you?
    Mr. Royce. No, I think we should go to Mr. Sires.
    Mr. Salmon. Okay. Let's go to Mr. Sires then.
    Mr. Sires. Thank you, Mr. Chairman.
    Good afternoon, and thank you to our witnesses for being 
here today.
    It has been 20 years since the North American Free Trade 
Agreement between the United States, Mexico, and Canada came 
into force. The trade agreement was a staggering scope and 
spurred vigorous and contentious debates in each country and 
houses of government. Proponents predicted the creation of 
countless U.S. jobs alongside the deterrence of foreign 
undocumented immigrants. Opponents, on the other hand, foresaw 
the opposite. The agreement aimed to eliminate virtually all 
tariffs on trade between partner countries over a 15-year 
period. In the process, NAFTA created the largest trade bloc in 
the world of its kind.
    Ultimately, although the agreement has served as a template 
for subsequent trade agreements, NAFTA has not lived up to the 
entirety of expectation espoused by its advocates, nor has it 
resulted in the catastrophic losses predicted by its opponents.
    There is no denying that in terms of trade alone, NAFTA has 
achieved impressive indicators. U.S. trade with NAFTA countries 
has more than tripled to over $1 trillion a year. Trade 
barriers have been eliminated, supply chains enhanced, 
opportunities for investments increased, and mechanisms for 
trade dispute resolutions were established.
    In 1993, the U.S. trade has increased over 500 percent with 
Mexico and over 190 percent with Canada. The United States is 
Mexico's largest trading partner and the largest foreign 
investor. Mexico, in turn, is the third largest U.S. trading 
partner after Canada. Together, Mexico and Canada accounted for 
32 percent of total U.S. exports in 2012. These statistics are 
telling, but they speak little of the broader implication least 
accentuated by the agreement.
    NAFTA was comprehensive but far from complete, let alone 
harmless. For one, labor and environmental provisions were both 
weak and separate from the core of the agreement. Additionally, 
there has been little convergence in terms of economic growth, 
income disparity, job creation, and regulations, in part 
because the agreement attempted to integrate two advanced, 
developed countries with a developing country that was ill 
ready to absorb the collateral damage of trade liberalization.
    This was especially true for Mexico, whose NAFTA advocates 
hoped the agreement would help them export goods, not people, 
when in fact the opposite occurred. As Mexico shifted away from 
agriculture, rural populations were pulled northward because of 
the weak job creation in Mexico and the demand for migrant 
workers in the United States.
    Meanwhile, in Canada and the United States, job losses were 
numerous in sectors such as manufacturing, as the new economic 
model exposed firms to greater competition. On the other hand, 
NAFTA cannot take sole responsibility for the various changes 
in trade, labor, environment, or various economic occurrences 
that have taken place amongst partner countries since 1994.
    Unforeseen global events, like the 9/11 terrorist attack 
and the global financial crisis of 2008, played a role. For 
Canada and the U.S., the agreement enhanced an already existing 
free trade accord, while for Mexico, the agreement provided an 
international treaty mechanism to solidify and expand existing 
domestic reforms.
    Today, there is talk of revisiting the agreement. The human 
and the economic costs are far too great to ignore this task. 
Tensions remain between border security and trade facilitation 
that affect the flow of goods, services, and people across the 
border.
    Of particular concern to me and countless New Jersey-based 
life science companies is Canada's unfortunate record of 
protecting intellectual properties through its discriminatory 
use of the so-called ``promise'' doctrine. The doctrine 
stipulates that the utility of a patent must be first 
demonstrated or predicted at the time of the patent 
application. This makes it easier for generic companies to 
challenge the usefulness of a patent drug and ultimately launch 
a parallel generic brand.
    This case is not just a matter of fairness but about more 
than 50,000 workers employed by 1,700 New Jersey-based life 
science companies that have invested more than $8.7 billion in 
research and development and created more than 72,000 jobs, 
spin-off jobs in New Jersey, and contributed nearly $27 billion 
to the New Jersey economy in 2012. That trading is economic 
reality of globalization does not justify ignoring unintended 
and direct consequences on the environment, workers, and 
private enterprise. As stewards of the world's largest economy, 
it is our duty to be mindful of this reality as future 
agreements come to the forefront. At the same time, lesser 
developed countries must recognize that large trade agreements 
are not substitutes for national development policies.
    Twenty years under NAFTA has made it clear that the 
agreement was both oversold and greatly underestimated. 
Furthermore, assessing the agreement's impact as an outright 
success or failure is far too narrow and simplistic.
    I look forward to hearing from our panelists and thank you 
very much.
    Mr. Salmon. Thank you.
    I would like to recognize the chairman of the full 
committee, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Salmon, I just want to thank you for the field 
hearing you held recently and for chairing this today, very 
successful field hearing, and it is a pleasure to see my former 
colleague, David Dreier, who did so much on the issue of 
advancing trade, along with our very successful former Trade 
Representative.
    Carla, it is good to see you, Ambassador, here with us as 
well.
    I think there is a great potential for increased trade in 
this hemisphere. And within North America, I think we could do 
a lot to boost our exports and create jobs here and not only in 
North America, as a matter of fact, but also in the Pacific as 
well. We have a key destination there for manufacturing goods 
from the U.S. All along that rim of the Pacific, and the Trans-
Pacific Partnership agreement I think is important to that end.
    I think, and this was the subject of Mr. Salmon's hearing, 
but I think that requiring better management across our borders 
is key to some of this, and our business group reports that 
risk management, improvements in infrastructure, a focus on 
travel and trade facilitation, that this can have a sort of 
symbiotic advantage in advancing not only our economic 
interests but also protecting our security interests at the 
same time. I think repairing and upgrading ports that have 
become a little dilapidated, a little deteriorated, closing 
underutilized facilities, extending the hours of overcrowded 
entry points, all of these things can, I think, assist and, 
frankly, are absolutely necessary.
    So, today, the United States is overtaking Russia in terms 
of our capacity at energy production, top oil and gas-producing 
Nation in the world in short order here I think, and Canada and 
Mexico are our top sources of importation of petroleum at this 
time into the U.S., so clearly, the other issue here is greater 
energy cooperation with our neighbors, which again, our goal at 
the end of the day is to have the cheapest energy costs in the 
world and not to have our economic competitors have that 
advantage, and so the affordability and availability of natural 
gas has the potential here of revolutionizing North American 
manufacturing. As you drop that cost down, it is amazing how 
energy has become in many ways the most important component; 
energy and labor are the most important components now for 
light manufacturing, and today, the U.S. I think has an 
opportunity also with Canada.
    Since 2008, the Canadians have been pushing hard on an 
agreement that has been on the President's desk for the 
Keystone XL project. The Canadians are not going to wait around 
forever, and they have made it clear to us the pipeline is 
going to be built; the question is whether it goes south or 
whether it goes west, and if it goes west, that oil is going to 
be shipped to our economic competitor, China.
    They are going to develop that resource one way or the 
other, and I think further delays on the final decision at 
Keystone will probably mean that the U.S. will be the loser in 
this, and we will have lower energy costs eventually coming 
from our economic competitor, who will be the beneficiary of 
the fact that we have turned down something that economically 
made all the sense in the world.
    Since I think the ratio is about three-quarters of what 
we--of what Canadians spend with the profits end up to be to 
buy manufactured goods from the United States. They are on our 
border. I mean, you think about the issues with respect to 
energy security. All of these demands are focused on Mexico and 
Canada here with respect to energy going forward.
    So I thank you all, and again, I thank the chairman for 
conducting this hearing today.
    Mr. Sires, thank you, too, for your engagement on these 
issues.
    Mr. Salmon. Thank you.
    The chair will recognize Mr. Meeks for a brief statement.
    Mr. Meeks. Thank you, Mr. Chairman, and Mr. Ranking Member.
    Over the years, I have worked with many of today's 
witnesses on finding ways to make pending U.S. trade agreements 
increasingly stronger, and in that regard, my friend and former 
colleague David Dreier was certainly an able partner. It is 
good to see him and all of you here today, and today, I hope we 
can combine a look back at NAFTA with a look ahead at how we 
might enhance the gains and learn from any mistakes.
    A couple of years ago, the Center for Global Development 
released a paper with the title, ``Why is Opening the U.S. 
Market to Poor Countries So Hard?'' In posing that question, 
the CGD highlighted the role that trade has played globally in 
lifting millions of people out of the ranks of poverty. I 
mention that question on this occasion because I want to start 
by noting a very important but often overlooked point in the 
debate about NAFTA's success or failure.
    The agreement was between two developed and one developing 
nation at a time when that was not a popular nor easy thing to 
do. If it is still challenging today to get developed nations 
to enter into meaningful trade agreements with developing 
nations, then certainly doing so 20 years ago was monumental.
    President Clinton was courageous in championing what he 
knew would be a difficult but important trade deal for America. 
NAFTA was good for Mexico at a time when its economy and 
democracy was tumultuous. The agreement was forward looking for 
the United States. We had a choice. We could have sat back as a 
Nation and yielded to the controversy and opposition to NAFTA, 
but we chose instead to go ahead of globalization trends.
    So we solidified rules of trade with two critical trading 
partners and in so doing ensured that we would have a fair 
chance to increase the exporting of U.S. goods and import in 
ways that would enhance our production and international supply 
chain.
    While there are winners and losers in any trade 
relationship and economic shift, NAFTA did not turn out to be 
the great job killer that opponents expected nor did it do as 
much as some of the enthusiasts expected.
    Lastly, let me just pivot for a few points that are 
particularly important to me as a Representative from the State 
of New York. Since 1993, New York exports of merchandise to 
NAFTA countries have grown by 123 percent. Merchandise exports 
from our State to Canada were at $15.4 billion in 2012 alone. 
These numbers demonstrate why New York is one of the 40 States 
that hold Mexico or Canada as their top trading partner. When I 
consider the totality of circumstances, I am convinced that 
both critics and enthusiasts made NAFTA better and continue to 
force improvements in the way we negotiate trade agreements.
    As I see it, TPP and TTIP are important opportunities to 
build upon the lessons of NAFTA, and I look forward to the 
perspective of our panelists, look forward to continuing to 
work with you, Mr. Chairman.
    Mr. Salmon. Thank you, Mr. Meeks.
    Pursuant to committee rule 7, the members of the 
subcommittee will be permitted to submit written statements to 
be included in the official hearing record.
    And without objection, the hearing record will remain open 
for 7 days to allow statements, questions, and extraneous 
materials for the record, subject to the length limitation of 
the rules.
    Mr. Salmon. I would like to introduce the first panel.
    Ambassador Hills is chairman and chief executive officer of 
Hills & Company International Consultants. She also served in 
the Cabinets of President George H.W. Bush as the United States 
Trade Representative and of President Gerald R. Ford as 
Secretary of the Department of Housing and Urban Development. 
Currently, she serves as a member of the Secretary of State's 
Foreign Affairs Policy Board. She graduated from Stanford 
University and obtained her law degree from Yale Law School.
    And next I would like to introduce David Dreier. During his 
more than three decades of congressional service, Mr. Dreier 
was a champion of enhanced trade liberalization between the 
U.S. and all of its global partners, but especially its North 
American neighbors. He introduced the first legislation calling 
for NAFTA and worked closely with Presidents Bush and Clinton 
throughout its negotiation and passage through Congress. He 
helped make the case for deepening ties with Canada and Mexico. 
He formed the House Trade Working Group, which not only was 
instrumental in the passage of NAFTA but continued to be a 
driving force in ushering every subsequent trade agreement 
through the House, including CAFTA and the FTAs with Colombia 
and Panama. He is the chairman of the Annenberg-Dreier 
Commission, which seeks to foster deeper connections and 
economic growth in nations of the Pacific Rim, including North, 
Central, and South America, Asia, and the greater Pacific.
    And so, with that, I would like to recognize Ambassador 
Hills.
    But before I do recognize you, I am going to explain the 
lighting system in front of you. You will each have 5 minutes 
to present your oral statement. When you begin, the light will 
turn green. When you have a minute left, the light will turn 
yellow. When your time has expired, the light will turn red. I 
ask that you conclude your testimony once the red light comes 
on.
    After our witnesses testify, all members will have 5 
minutes to ask questions, and I urge my colleagues to stick to 
the 5-minute rule to ensure that all members get the 
opportunity to ask questions.
    Ambassador.

 STATEMENT OF THE HONORABLE CARLA A. HILLS, CHAIRMAN AND CHIEF 
  EXECUTIVE OFFICER, HILLS & COMPANY INTERNATIONAL CONSULTANTS

    Ambassador Hills. Thank you, Mr. Chairman, and thanks, 
members of the committee.
    It is an honor for me to appear before you and particularly 
with David Dreier, former chairman of the House Rules Committee 
and one of the greats who served this body. His efforts were 
instrumental in securing the approval of the North American 
Free Trade Agreement, the NAFTA, and as noted, it was the first 
comprehensive free trade agreement to join developing and 
developed countries. It achieved broader and deeper market 
openings than any prior trade agreement negotiated anywhere in 
the world, and as a result, economic activity among the three 
nations exploded.
    Today, Canada is America's single largest export market. 
More than 8 million jobs depend upon our exports to Canada. And 
Mexico is our second single largest export market, and some 6 
million U.S. jobs depend on our trade with Mexico.
    Over the past two decades, a highly efficient and 
integrated supply chain has developed among the three North 
American economies. More than $2 billion worth of goods and 
services cross our northern border every single day and while 
roughly $1 billion per day crosses our southern border.
    Specialization has boosted productivity in all three 
economies. We not only sell things to each other, we make 
things together, and quite remarkably for every dollar of goods 
that our two neighbors sell to us, there are 25 cents worth of 
U.S. Inputs in the Canadian goods and 40 cents in the Mexican 
goods. By way of comparison, with respect to our imports from 
China, that is 4 cents.
    And most of those who have complained about the NAFTA focus 
on Mexico, but the economic data proves that having Mexico as a 
NAFTA partner has served U.S. interests extremely well. Last 
year, roughly 14 percent of our total exports went to Mexico, 
and as the chairman pointed out, that is more than all of our 
sales to the rest of Latin America. NAFTA, our exports to 
Mexico have grown two times faster than our trade to the rest 
of the world, and that is true of Canada as well.
    Although some contend that the NAFTA has depressed wages, a 
recent study by economists at Yale and our Federal Reserve 
concluded that wages, when adjusted for inflation, have 
actually risen as a result of the NAFTA in all three countries, 
and it is widely agreed that the NAFTA's market opening 
increased jobs connected to exports, which pay between 15 and 
20 percent more than jobs that are purely domestically focused.
    With 116 million consumers and a purchasing power of over 
$1 trillion, Mexico offers significant opportunity to U.S. 
entrepreneurs, large and small, but smaller enterprises in 
particular benefit from Mexico's proximity and openness to our 
trade because Mexico purchases about 11 percent of the exports 
from small- and medium-sized businesses, which account for more 
than half of our Nation's job creation.
    In short, the NAFTA has made our region one of the most 
competitive in the world, but the rest of the world has not 
stood still. Increasingly, trade agreements where the United 
States is not a party give entrepreneurs from other countries 
preferential access to key markets that our entrepreneurs don't 
have, and there are a number of actions that we could take, the 
building on the NAFTA platform, that would create new 
commercial opportunity, cut costs, and create jobs, and let me 
mention quickly just three.
    First, the Trans-Pacific Partnership. In 2012, Mexico and 
Canada joined the United States and eight other nations to 
negotiate the TPP to link Asia and Pacific. There are eight 
bilateral trade agreements between the three NAFTA governments 
and the other TPP participants that were negotiated after we 
negotiated the NAFTA. Their differences in rules of origin and 
custom procedures add costs to our trade which could be dealt 
with in the TPP.
    Second, the Pacific Alliance is an ongoing trade 
negotiation initiated by Mexico, Peru, Colombia, and Chile in 
2011. Last year, Costa Rica gained approval to join. Mexico and 
Canada are observers along with seven other nations. Canada and 
the United States, having them join the alliance could 
eliminate costly regulatory differences among the three 
nations.
    And thirdly, a North American-European trade agreement. 
Last year, the United States and the European Union's 28 states 
launched a Transatlantic Trade and Investment Partnership. Our 
average tariffs are quite low. The real potential for boosting 
economic growth will come from reducing the maze of regulatory 
standards covering a long list of goods and services. Enlarging 
this agreement to include our two neighbors, which already have 
separate trade agreements with the European Union, would 
greatly reduce costs and complexity of trade. Of course, the 
infrastructure is a very big issue. The United States could 
address that.
    I am grateful to the chairman and members of the committee 
for the opportunity to share my thoughts on the NAFTA and 
moving forward and how we can build upon it, and so I thank you 
and look forward to your questions.
    [The prepared statement of Ambassador Hills follows:]
    
    
    
    
    
    
    
    
    
    
                              ----------                              

    Mr. Salmon. Mr. Dreier.

 STATEMENT OF THE HONORABLE DAVID DREIER, CHAIRMAN, ANNENBERG-
                DREIER COMMISSION AT SUNNYLANDS

    Mr. Dreier. Thank you very much, Mr. Chairman.
    I was talking to one of our great diplomats yesterday who, 
when I said I was going to be testifying with Carla Hills 
before your subcommittee, Mr. Chairman, he described her as a 
force of nature, and not long ago, I was talking to someone 
else about Carla Hills, and this woman said she is a national 
treasure.
    You didn't have everything in that introduction. She was 
the first woman to be the Secretary of Housing and Urban 
Development, the fourth woman to serve in a President's 
Cabinet, and she has roots in California, which even though I 
no longer represent California, I am always pleased to be in 
her presence. And I will say that when I think back about my 
involvement, I was little more than a foot soldier in the 
George H.W. Bush, Carla Hills, Bill Clinton, Mickey Kantor 
struggle to make sure that we succeeded with the North American 
Free Trade Agreement.
    It is particularly poignant for me, Mr. Chairman, to be 
here, and I will say that I don't have too many regrets of my 
service, but one of them was that I wasn't able to serve with 
you again. I campaigned with you in the last election, I know, 
but I worked closely with you on this issue of trade, and I 
know you feel passionately and strongly about it, and I 
appreciate that, but I am sorry we weren't able to serve 
together.
    I also have to say that it is great to see Mr. Sires. As I 
said in the anteroom, we worked very closely on the Colombia-
U.S. Free Trade Agreement, and I appreciated his activism and 
support there, and also I want to say that I appreciate the 
concerns he raised in his opening statement as well.
    And Gregory Meeks has been my partner in crime for a long 
period of time on virtually every trade agreement, and he has 
stepped up, often facing criticism within his party, and he has 
done it because he knows and believes it is the right thing to 
do.
    And I have to say to Mr. Duncan and Mr. DeSantis and Mr. 
Radel, it is nice to see you all, and I hope very much that you 
will focus attention on this issue because it is so important.
    I have to say, Mr. Chairman, this is the first time that I 
have been back to the U.S. Capitol since January 2nd of last 
year, which is when I had the opportunity to manage the floor 
debate for the special rule on the fiscal cliff legislation, 
and by virtue of being the floor manager, I took the 
opportunity to offer some advice, and that is why it is 
particularly poignant for me to be invited to be here on this 
occasion, because in the last speech that I gave on January 
2nd, the day before Ambassador Hills' birthday, I will say that 
I talked about the need for bipartisanship, and I talked about 
the issue of trade as creating a very unique and important 
opportunity for us to do just that.
    And that is why I am very gratified to see that while we 
had this bipartisan effort put together with President George 
H.W. Bush and President Clinton, and as I said Ambassador Hills 
and Ambassador Mickey Kantor and others within both 
administrations who worked very strongly on this, I am 
particularly pleased to see that we are today working for a 
broader bipartisan effort on this.
    And I want to congratulate Chairman Royce for the very 
strong statement that he made in support of something that we 
have yet to discuss, and that is trade promotion authority. It 
seems to me that as we look at the imperative of moving ahead 
with all of these agreements, it is going to be absolutely 
essential that we give the President of the United States the 
opportunity to negotiate. Now, I know there is some who have 
raised concern about trade promotion authority, believing that 
somehow this transfer of power to the President.
    When Carla Hills was United States Trade Representative, I 
will tell you that during the negotiations of the North 
American Free Trade Agreement, she did because she understood 
the imperative of consulting with the United States Congress, 
and she did that consistently, and other USTRs have done that 
as well. Why? Because they know that this institution has the 
power to vote yes or no on those agreements.
    And so I do believe that moving ahead with TPA and 
maintaining the right that the Congress has to defeat a bad 
agreement is clearly there, although I believe that virtually 
any opportunity that we can reduce the barriers to the free 
flow of goods, services, capital information, ideas, and people 
is a very important thing for us to do.
    As you mentioned, Mr. Chairman, for the last year, I have 
had the opportunity to chair a commission. I am happy that 
Ambassador Hills serves on the advisory board along with Mack 
McLarty and Jon Huntsman and Henry Kissinger and Madeleine 
Albright of our commission, which really grew from the vision 
that Ambassador Walter Annenberg had.
    When Ambassador Hills was negotiating the North American 
Free Trade Agreement in the late 1980s and early 1990s, 
Ambassador Annenberg was sitting at his home at Sunnylands, and 
he was talking about the fact that the future is around the 
Pacific. Mr. Chairman, nearly two-thirds of the global GDP and 
nearly two-thirds of the global population is around the 
Pacific, and by virtue of that, I truly believe and you as a 
westerner understand that, as opposed to these guys from Jersey 
and New York, understand full well that that is in fact the 
wave of the future.
    We have a tendency here in New York and Washington to focus 
across the Atlantic. We have a wide range of entities that do 
that, and it is true TTIP will in fact be the largest free 
trade agreement in the history of the world, but I suspect that 
TTP may be completed before it, and until TTIP is put into 
place, the Trans-Pacific Partnership, now that Japan is part of 
that, will be the largest free trading bloc in the history of 
the world.
    It seems to me that that vision that was put forth by 
Walter Annenberg is one that was very, very prescient, and I am 
pleased to be utilizing his estate at Sunnylands for a wide 
range of meetings. The Presidents of China and the United 
States met there last summer, and I am hoping very much that we 
will be able to do things like include leaders within the 
Pacific Alliance there, and so I have lots of things that I 
could go through.
    I want to talk about the changes that have taken place in 
Mexico. One figure I was just given yesterday is did you know 
that as we look at the new Mexico, yes, poverty and the 
disparity in income levels is a very important thing, but 
Mexico now is part of a very important partnership on the 
Learjet, Canada, United States, and Mexico, all countries 
involved in that process, and guess what? Mexico last year 
graduated more engineers than the United States of America did, 
and so this perception of Mexico is one that needs to change. 
And I think that as we mark this 20th anniversary, Mr. 
Chairman, it is very, very important for us to do everything we 
can to focus on how we can address these concerns. The answer 
to the problems of NAFTA is more NAFTA.
    Thank you very much.
    Mr. Salmon. Thank you very much, Mr. Dreier.
    [The prepared statement of Mr. Dreier follows:]
    
    
    
    
    
    
                              ----------                              

    Mr. Salmon. Ambassador Hills, I received a surprisingly 
large number of calls from many organizations and companies 
expressing concerns with Canada's inconsistent IPR protection 
and enforcement.
    As you may know, last year, Canada remained on USTR's watch 
list because many American companies still face legal 
uncertainty during the administrative process to obtain IPR 
protection. How can we confront the issue, and how can we 
ensure that our trading partner doesn't institutionalize 
bureaucratic barriers for our companies?
    I am also concerned that some of the worst offenders of IPR 
violations globally would be India and China, and how do we 
stress to them the importance of fixing those problems if a 
developed nation such as Canada continues to deal with our IPR 
issues in the manner that it does? I am a strong supporter of 
NAFTA, but I think this is an issue we have got to address 
because it is hurting a lot of our companies that are doing 
business in Canada.
    Ambassador Hills. I agree that intellectual property 
protection is absolutely essential. We are on the up scale in 
terms of our production, but even in great families, you have 
differences, and we do have differences with Canada, as they do 
with us.
    The remedy is to sit down and work through it. It is 
certainly made easier by reason of having a trade agreement 
that sets out the rules so that you have a mechanism of 
addressing and getting a solution to the rules, so we have a 
lot of positive, many, many more positive with our first 
largest trading partner or single largest, and some negatives, 
and they have a few complaints about us.
    Mr. Salmon. I am sure that is true. I think we would like 
to explore any and all opportunities because I think globally 
it is more important than just our bilateral relationship. I 
think it portends to influence a lot of our other relationships 
on IPR with other nations.
    Mr. Dreier, did you want to comment on that?
    Mr. Dreier. Well, the only thing I would add to that is we 
have a process in place to deal with this, and that was really 
part of this whole negotiation. And, you know, when you are 
dealing with countries and businesses that want to remain on 
the cutting edge, there is going to be a lot of competition, 
and they are going to do everything they possibly can to ensure 
that that takes place.
    Ambassador Hills is absolutely right, the imperative of 
focusing on the rights of property is a very, very important 
thing, and I will say she and I were just discussing earlier 
today that as nations become more innovative and creative, and 
as they develop patents themselves, and we were talking about 
the fact that in China, we are seeing a dramatic increase in 
the number of patents being created. As that kind of 
intellectual property is developed there, you are going to see 
a greater degree of responsibility take place.
    Mr. Salmon. It seems like, I mean, in a nutshell, what is 
happening is, and I have heard it probably more associated with 
some of our pharmaceutical companies that go over there, and 
the generic companies appeal the process, saying that they 
haven't really lived up to everything they promised to deliver, 
and so the patents should be invalidated and they should be 
able to go ahead and come in and take over those patents in the 
generic form.
    As I have talked to some of my friends from Canada, they 
say, well, that is going through the courts. But I think there 
are two opportunities maybe that we are going to have to look 
at. One is I think Canada could address it through their 
legislative process, to make sure that that is clarified and 
that IPR protection is paramount to them as it is to us; and, 
then, secondly, there is always the possibility of, we hate to 
do it, but filing a claim. I don't want to rule that out.
    One last question, and that is dealing with energy. I am as 
excited as I can be to see what is happening in Mexico right 
now and them making the constitutional changes to allow 
investment from foreign oil companies and foreign partners, and 
I think it is going to do dramatic things to provide energy for 
the entire continent.
    But one of the things that kind of seems stymied still is 
the XL pipeline, and I know that our friends from Canada are 
very, very concerned about the length of time where we have 
been dragging our feet. Any thoughts from either of you on, you 
know, what we should do to move forward on that, the XL 
pipeline itself?
    Mr. Dreier. Well, I am on record when I served here. 
Clearly, I am very supportive of proceeding with the XL 
pipeline, and for all the reasons that have been stated, to me 
it is very obvious and apparent. And I think it is also 
something that can help us in our relationship with Canada.
    As you know, Mr. Chairman, next month, Prime Minister 
Harper will be meeting with Presidents Obama and Pena Nieto, 
and I think that this will clearly be a topic of discussion, I 
suspect, and I also want to say that as we look at this overall 
issue, I want to congratulate Secretary Kerry for the very 
strong speech that he delivered at the Organization of American 
States recently in which he talked about this expansion of our 
trade relationship within this hemisphere. I think it is an 
important and a very positive sign of this administration's 
desire to move forward on it, and I hope that the XL pipeline 
will be part of that process.
    Mr. Salmon. Thank you.
    The chair recognizes Mr. Sires.
    Mr. Sires. Thank you, Mr. Chairman.
    You know, intellectual property is one of the big issues 
for me. Obviously, coming from a pharmaceutical State like New 
Jersey, you know, we consider ourselves the medicine capital of 
America, so many jobs.
    But it seems like the barrier in Canada is just one. We 
seem to get--China hacks into our computers, tries to steal our 
property. Russia does the same thing, all these other 
countries. It seems that our companies here in this country are 
bombarded with people trying to steal our research.
    And then you come to a friend, which I consider Canada to 
be, and then we have this barrier, which seems very silly, on 
pharmaceuticals when it has been proven already to be useful 
and they come up with generics. I don't know if the courts are 
ever going to solve this. I think we have to take, I don't 
know, firmer steps to get them moving in the direction where 
they can set some standards so we can really put this beside us 
and go on to the next issue because one of the issues that I 
have with the South Korean trade agreement was the intellectual 
properties, you know, of our companies.
    So I was just wondering with NAFTA, what are some of the 
things that we could improve on that maybe we didn't look at in 
terms of intellectual property and other factors? What did we 
miss in this?
    Mr. Dreier. Let me, before Ambassador Hills, let me just 
defend her a little bit and let's look at the time frame of 
this. We are marking the 20th anniversary. Think about where we 
as a world were 20 years ago. Where was the Internet 20 years 
ago? I read Eric Farnsworth's testimony. He underscores that in 
his remarks. It was virtually nonexistent.
    Now, obviously the pharmaceutical industry existed, but the 
kinds of advances that have been made in the last two decades 
have been monumental as well, and I think that it is important 
to note, to say that things were missed or there were mistakes 
that were made, most of this has been what has taken place in 
the two decades that have followed the passage and 
implementation of the North American Free Trade Agreement.
    And I think one of the important things that needs to be 
done as we look at negotiations for the future, and I have 
argued this for the Trans-Pacific Partnership, is to have a 
degree of fluidity and flexibility so that as other countries 
are able to meet certain guidelines and standards, that they 
can become part of these agreements as well, and so I think 
that one of the important things that needs to be done is not 
be too rigid within the structure. So I just say that partially 
in defense of Ambassador Hills.
    Mr. Sires. You know, when I say that I mean because I want 
it to move forward and be better.
    Mr. Dreier. Right. Absolutely.
    Mr. Sires. You know, I don't want it to just----
    Mr. Dreier. Right.
    Ambassador Hills. Well, let me say that the agreement at 
the time provided the highest level of patent, trademark, 
copyright, trade secret protection that had been negotiated 
anywhere, and as David Dreier has just stated, a lot of change 
has taken place. So we can enhance those rules through the 
mechanism of the Trans-Pacific Partnership, for example, we 
have got three mega agreements that we could address and 
strengthen the rules, but why not sit down at the leaders 
meeting with Canada and talk about how this erodes the 
partnership?
    And I do believe that our northern and southern neighbors 
would like to join, for example, the Transatlantic agreement, 
but if we have differences that create friction, it will be 
difficult to pull that off, and so talking about it, working 
your way through it, and trying to get the rules to cover good 
intellectual property of pharmaceuticals, which is primarily 
the problem in Canada, I think it can be done, but it can't be 
ignored.
    Mr. Dreier. Let me just add, if I could, that I think that 
Ambassador Hills raises a very important point, and that is, my 
personal view as we look at TTIP, the Transatlantic Trade 
Investment Partnership, that the idea of doing a U.S.-European 
Union free trade agreement is a nice start, but by virtue of 
the fact that we have had so much success with the North 
American Free Trade Agreement, I am one who believes that the 
idea of making this a NAFTA-EU free trade agreement would 
actually be much more beneficial to both our country and to the 
hemisphere and the global economy as well, and so I would hope 
very much that we would have the chance to move forward in that 
area.
    Ambassador Hills. I fully agree with this. I think we 
actually will diminish our gains if we don't do that, and that 
is because we are unique in North America. As I said, we not 
only sell things to one another, we make things together, and 
our markets are so interlinked that 40 cents of every product 
that we import is U.S. content.
    If we have different rules of origin with Europe, this 
simply won't work. It will destroy the NAFTA platform that has 
given us so much and the statistics that the chairman mentioned 
about the gains that we have already achieved. So this is an 
imperative that I hope Congress takes a good hard look at it.
    Mr. Sires. Well, I don't want to beat up on Canada too 
much, but the chairman and I are working on a bill to extend 
the amount of time Canadians can stay in this country from 6 to 
8 months. So we will work on that.
    Mr. Salmon. Thank you.
    The chair recognizes Mr. Radel.
    Mr. Radel. Thank you, Mr. Chair.
    Regardless of some of the positions I have found my own 
self in life, I have always been the eternal optimist, and as 
we look at NAFTA and some of the very real effects that it has 
had on people and their jobs, there have been incredibly 
positive things that have come, big picture things that both 
Democrats and Republicans cannot deny and can agree on to move 
forward. National security, just an easy one. When you have got 
a good working relationship with people, you are going to have 
a solid relationship to move forward and not have any stresses 
or strenuous relationship moving forward.
    The other issue here, too, as we talk about countries, even 
more specifically south of us, is the hot topic of immigration. 
No one can deny, one of the best ways to solve an illegal 
immigration problem in the United States is to make sure men 
and women coming from other countries can put food on their 
kids' plate, and the best way to do that is to be able to 
provide economic security, jobs, and that is exactly what we 
have been able to do for years with this, and I commend you 
both for your work on this.
    Just some general questions. What more can we, what more 
can the Federal Government cap do to help facilitate shared 
manufacturing production?
    Ambassador, you put it right. We make things together. What 
more can we do to provide more of that certainty and stability 
to keep this and to move forward in more free trade around the 
world?
    Ambassador Hills. It has already been mentioned that the 
infrastructure going north and south is poor, and sometimes a 
truck bringing that component part that we need to be globally 
competitive is held up at the border, not for just an hour but 
sometimes many hours. And they come to the border, and as you 
know, they have to unload, get a lorry, take it across the 
border, put it on, so it has three trucks in effect that have 
to carry this component that our manufacturers are waiting for.
    This is a cost in terms of time. This is a cost in terms of 
money, and that makes us less competitive for those markets 
that don't have that extra cost. Because of Mexico and Canada's 
proximity to us, that makes us more competitive so that when 
lower cost countries in Asia, for example, seek to compete, 
they have a transportation cost. We are adding a transportation 
complexity cost that could be avoided. So we ought to give some 
thought to that, have a real plan for how we address it.
    We perhaps, at least in my view, have been remiss on how we 
have handled the trucking issue with Mexico, and if we expect 
other nations to adhere to agreements, then, of course, we 
must, too.
    Mr. Dreier. Let me just add to that. Thank you, Mr. Radel.
    The Economist had an interesting piece on NAFTA 20 in which 
they pointed, as we all do, with great regularity at September 
11th of 2001. Very, very sadly what happened on September 11th 
played a big role in undermining the ability to deal with the 
immigration issue. It exacerbated the tension at our borders, 
and I think that, obviously, border security is critically 
important, and it is something that needs to be addressed. And 
I always argued when I was privileged to serve in this House 
that the number one responsibility of the Federal Government is 
our Nation's security. So we can't forget that.
    We also know that with these agreements, it is important 
for us to realize the fact that infrastructure has to be 
improved. I was very concerned about the trucking issue, as 
Ambassador Hills has said, and I think that we need to do 
everything that we can to make it as easy as possible for this 
free flow of goods, services, capital, information, ideas, and 
people to take place. We have so many opportunities to work 
together.
    We all in our freshman economics class in college learned 
the economic theory of comparative advantage. Comparative 
advantage says we do what we do best, and The Economist 
underscored the bombardier Learjet example of Pratt and Whitney 
designing the aircraft here, the assembling taking place in 
Wichita, and in Quertaro, Mexico, we saw manufacturing take 
place obviously at a company that is now owned by Canada.
    The only thing done outside of this hemisphere is done in 
Ireland, and that is the wing manufacture. The market itself is 
going to play a role in determining what Canada, the United 
States, and Mexico will do, and I have a great deal of 
confidence in it.
    Mr. Radel. I agree 100 percent.
    With my time winding down, I would just once again thank 
you both so much.
    And thank you, Mr. Chair, for calling this.
    Mr. Salmon. Thank you.
    The chair recognizes Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    I enjoyed listening to you and couldn't agree more on many 
of the points that you have raised. You know, as we enter into 
negotiations for TPA, which we have to figure out in a 
bipartisan way to pass, and then dealing with TPP and TTIP, all 
very important.
    Oftentimes, I ask, you know, we see other nations are 
entering into trade agreements, and I think as the Ambassador 
indicated, we need to get in the game and negotiate and have 
our own trade agreements or be a part of it like TPP, which I 
think would elevate standards, our standards, because if we 
stay on the sideline and let them negotiate with China, for 
example, or others, then you could expect that those standards 
will be lower and not the high standards that we set in our 
trade agreements.
    So I think it becomes tremendously important for us. 
Basically, and I think it is exactly what Mr. Dreier has 
indicated, the fact that 20 years ago so much has changed, 
there has been so much--the economy and technology is so 
different today than it was 20 years ago, and the world is so 
much smaller today than it was 20 years ago, it becomes that 
much more important for us to engage.
    That being said, we have got to figure out here how to make 
sure that we do it in a bipartisan way and understand that, 
actually, when you look at most of the trade agreements, it 
changes our trade deficit. Our trade deficit goes down because 
markets that had not been open to us, where we could not sell 
our goods that were made in America, now are open so that we 
can sell those goods to those individuals. That is where in 
fact the majority of the buyers are. So if we are going to 
expand, it has to be outside of the borders of the United 
States of America. And that is why that is so important.
    So all that to say now, in trying to do a bipartisan deal 
and trying to work collectively together, there was a ground--
what I believe was a groundbreaking trade compromise known as 
the May 10th agreement in which we--there was significant 
update and change for I believe the better, a better way that 
we negotiate trade pacts.
    So my first question to you, do you think that the May 10th 
deal addresses many of the concerns that some, rightly or 
wrongly, you know, when people talked about NAFTA because you 
still hear NAFTA as if it was something that was drafted 
yesterday and not something that you could build upon, but do 
you think that it addressed some of those concerns?
    And how can we build upon that, which I think that will 
help us go into the direction of this shouldn't be an issue, 
this shouldn't be a Democrat or Republican issue. This is an 
issue that is important for the United States whether you are 
Democrat or Republican.
    Ambassador Hills. I agree with you that trade is absolutely 
vital.
    If you look at what is the fuel for our economic growth 
today, trade is essential, and the trade promotion authority is 
extremely important. It is not only important because of the 
division in our Government where you have power over trade and 
finance, but the President has negotiating power.
    Our trading partners don't want to sit at the table with us 
and put their tough political issues on the table unless they 
know that the agreement is fairly going to be voted up or down. 
If the agreement is not a good one, vote it down, but if the 
agreement is one that you think is good, don't unravel it with 
amendments that are going to destroy the agreement, and the 
prospect of that means that you don't get as high a quality of 
agreement as you otherwise would get.
    But how do we deal with the changes? Yes, globalization has 
absolutely transformed the world. I mean, I suspect that you 
didn't use a computer in 1989. There are so many things that we 
didn't do and didn't have 20 years ago.
    How do we build on the NAFTA? Well, we have a wonderful 
opportunity with, for example, the Trans-Pacific Partnership. 
We don't have to reopen NAFTA. Our two neighbors are sitting at 
the table with us. And whatever we agree to in the Trans-
Pacific Partnership that changes, upgrades, adds to the NAFTA 
will be the governing document.
    So we really want to get on with this and get a really good 
Asia-Pacific agreement. And my hope is that we can achieve the 
promise that we made that we would have an agreement that 
covered all of Asia-Pacific, all of APEC, all the 21 economies. 
But this is a first step, and we should make it a good one.
    Mr. Dreier. And I suspect that the May 10th concerns that 
were raised will clearly be part of the TPP negotiating 
process. And that will, as the Ambassador has said, be the 
vehicle that will allow many of these concerns that Mr. Sires 
and that others have raised to effectively be dealt with.
    Mr. Meeks. I am out of time, I know, but if I had time, I 
would ask you about Trade Adjustment Assistance and whether you 
think that would fall in. I think it is important because 
some--we have lost, I believe, more jobs because of 
technological advances than we have because of trade. But I am 
out of time, and so I will leave that for another time.
    Mr. Dreier. It has expired, but I will say that I do 
believe that, as we proceed in a bipartisan way, that Trade 
Adjustment Assistance will continue to need to be part of the 
process itself.
    Ambassador Hills. And I think it is actually helpful, 
because we know that trade creates growth generally, but there 
are some dislocations. And for our Nation, it is very good to 
have Trade Adjustment Assistance.
    Mr. Salmon. Thank you.
    The chair recognizes Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman.
    And, Mr. Dreier, welcome back to Congress.
    Mr. Dreier. Thank you very much.
    Mr. Duncan. You are missed, your leadership is missed, your 
composure in difficult issues is missed. And you were a role 
model for a lot of us to follow in how you handled yourself as 
a Congressman. So, again, I say welcome back.
    There are a lot of issues with trade. I met with the 
members of Parliament that are part of a transatlantic group on 
terrorism last year, and we discussed TTIP. And they were very 
interested in seeing that trade agreement move forward at some 
point.
    They raised some concerns about agricultural products from 
the U.S. and Europe. I think that is a challenge that we are 
going to have to address. If you want to touch on that, we will 
get to that in a second.
    And then I would like to talk about energy, primarily. This 
may be for Mr. Farnsworth more than this panel. But with what 
Mexico is seeing with their energy sector, with the 
denationalization of the energy sector and Pemex and more 
competitiveness down there in future years, how do you think 
the NAFTA countries will benefit from more energy resources 
here in North America? And how does that apply to trade?
    And then the last thing I will mention is with TPP. And I 
have to support the textile industry in South Carolina. What we 
saw with the Korean Free Trade Agreement, the reason I voted 
against it was the fact it felt likes textiles were sort of 
thrown to the wolves there at the end of the negotiations at 
the end of the Bush administration and were treated unfairly 
with Korea. So we are very cognizant of what is going on with 
Vietnam and with dumping and countries of origin with regard to 
textiles.
    And then the last thing I would touch on is, we need to 
make sure that, with MTBs, we have companies like Michelin and 
Bridgestone that have certain raw materials that are vital to 
the production of tires in South Carolina, and a lot of times 
they have to get a miscellaneous tariff benefit changed in 
order to get those raw materials in so that those jobs can be 
kept in South Carolina and not sent to Brazil or Asia, where 
the resources may be a little more plentiful.
    So those three things: Energy primarily, the textile issue, 
MTBs, and also agricultural products. If you all just want to 
touch on those, and I will just open it up for you.
    Ambassador?
    Ambassador Hills. Well, we certainly should address the 
agricultural issues. We have 90 percent of our subsidies going 
to five commodities: Corn, wheat, soy, cotton, and rice. And if 
nothing goes to string beans or apples--and you hear about all 
the health foods in the world, but with our economy in the 
financial state it is in and the commodity prices being 
relatively generous, it would be very well that we would be 
able to address this issue. And Europe, for the same reason, it 
could move on these issues.
    That ability to talk about agriculture would get us 
services put by other countries on the table, where we have 
tremendous competitive advantage. But if you have nothing to 
put on the table, you are going to get nothing given to you on 
the table.
    And so agriculture is absolutely key. When I said we have 
relatively low tariffs with Europe on products, agriculture is 
the exception. Agriculture, textiles, glassware, footwear, you 
take those out and our average tariffs is about 3 percent. You 
put those things in and you have dislocations.
    And as far as energy goes, you know, inviting Mexico in the 
TTIP would provide President Pena an umbrella to talk about a 
major trade agreement that would help him move forward on his 
economic reforms that we want him to make. He has put through 
the energy constitution. He still has to get legislation, he 
still has to have regulation. We want him to move forward and 
liberalize telecommunications. If he were part of the team 
negotiating to make North America more competitive, it would 
make all the difference in the world.
    And that is what Salinas did with the NAFTA. He used that 
as an umbrella and said, well, folks, look at what I am 
getting, so please stay with me; I want this trade agreement, 
and you will get something for it. I think that this should be 
part of our strategic thinking.
    Mr. Dreier. Let me just add, I don't have an opinion on the 
MTB issue as it relates to those. But I will tell you that, Mr. 
Duncan, I feel very strongly about the so-called Pacto, which 
is the reform that President Pena Nieto has boldly pursued. And 
he is working, and it has been challenging to bring together 
the three major political parties in Mexico. But the idea of 
dealing not only with telecommunications and energy but labor 
and education and fiscal reform, those five areas, is something 
that is really groundbreaking.
    I mean, you know, we have talked about the fact that I, you 
know, hung around this place for more than a couple of years. 
And if you go back to the 1980s--and you guys are too young to 
remember that, but I will tell you that I remember very 
vividly. It is when I started here. And I was younger than you 
when I started here doing that. But I will say that, at that 
time, the struggles that existed between our two countries were 
very, very great. And the idea of looking at political reform, 
the five things that I just mentioned within the Pacto, the 
fact that--the Woodrow Wilson study the other day pointed to 
the fact that, going back to the 1980s, the average Mexican 
family lived in a one-room home; today they live in three-room 
homes. I mean, there are so many advances that have been made.
    And I believe that that is going to enure to the benefit of 
your constituents in South Carolina. Why? Because as we see 
that economy growing--Mr. Sires pointed out correctly, we still 
have very serious poverty problems that exist in Mexico and the 
United States. The displacement Ambassador Hills correctly 
pointed to is why we need Trade Adjustment Assistance. But I 
believe that as we see these economies grow, they are going to 
provide a market--they are going to provide a market for the 
workers you have in your congressional district. And I think 
that is something that needs to be remembered.
    It is not going to be perfect, and it is not going to 
remain exactly as it is. But, I mean, we believe in the 
marketplace itself. And, you know, Ronald Reagan really 
envisaged this on November 6th of 1979 when he announced his 
candidacy for President. 1979, Ronald Reagan, in that 
announcement, said that he envisaged an accord of trade among 
all the Americas. This was part of the Reagan vision that was 
then implemented by the Bush-Hills team and then passed through 
the Congress by the Clinton-Kantor team.
    And I will say that I think this is going to be a real 
winner for your constituents as we move ahead with it.
    Mr. Duncan. Thank you for that. And I appreciate the 
testimony.
    I yield back.
    Mr. Salmon. Thank you very much.
    That concludes the questions. We would love to thank our 
distinguished first panel.
    Mr. Dreier. Thanks very much. It was a great honor to be 
able to be back and see you guys.
    Ambassador Hills. Great pleasure to join you.
    Mr. Salmon. Thank you very much.
    I would like to change the panels now and have the second 
panel be seated.
    We might let the second panel know, we have been notified 
that our vote on the omnibus budget, or appropriations bill, 
excuse me, is going to take place. It was supposed to be 
sometime in the last 15 minutes. So if it buzzes and we have to 
leave, please be patient. We will be back. It is the last vote 
of the day, and quite an important one.
    So, with that, we will go ahead and dispense with 
introductions just to save time. I ask for unanimous consent to 
go ahead and do that. Without objection, and we will go ahead 
and start with you, Mr. Farnsworth.

 STATEMENT OF MR. ERIC FARNSWORTH, VICE PRESIDENT, COUNCIL OF 
               THE AMERICAS AND AMERICAS SOCIETY

    Mr. Farnsworth. Well, thank you very much, Mr. Chairman. 
Good afternoon to you, to the members of the subcommittee, Mr. 
Sires. It is a real honor to have the opportunity to appear 
before you again this afternoon.
    And I do want to reemphasize the fact that this is a 
continuation, as well, of the field hearing from Tucson, which 
was a real success. And it is a particular pleasure, as well, 
to join other witnesses today of such prominence and stature.
    If I may, let me give you what I believe to be the bottom 
line first: NAFTA was first and foremost an agreement designed 
to increase trade and investment among its three parties, 
promote North American economic integration, and support a 
vision of open market democracy for Mexico, providing that 
Nation with a clear path toward political and economic 
modernization.
    On all three priorities, NAFTA has succeeded. As we have 
already heard, since 1993 U.S. trade in goods and services with 
Canada and Mexico has increased from $370 billion a year to 
over $1 trillion today. Annual trade between the United States 
and Canada has more than doubled; with Mexico, it has more than 
quadrupled. More than 40 U.S. States count either Mexico or 
Canada as their top export destination.
    Perhaps more importantly even than those statistics, 
however, NAFTA institutionalized a vision for North America 
that would have been impossible absent significant political 
and economic reforms in Mexico, and NAFTA both catalyzed such 
reforms and has also benefited from them.
    Trade agreements are not just about trade and investment. 
They are also critical, if often overlooked, tools of U.S. 
foreign policy. Unquestionably, NAFTA has directly supported 
Mexico's democratic transformation over the past 20 years, thus 
contributing to the true partnership that now exists between 
our two countries. In fact, we are allies in a way that 20 
years ago it was almost inconceivable to even consider.
    It has empowered new constituencies in Mexico and a growing 
middle class that has demanded and received an increasingly 
clear political voice. And as we see Mexico's economy generate 
new opportunities, coupled with the slowdown of the U.S. 
economy, net migration flows from Mexico have become virtually 
zero, reducing the temperature on this bilateral irritant. A 
full accounting of NAFTA's impact, therefore, cannot overlook 
these very important issues.
    Since NAFTA was implemented, however, the world has changed 
dramatically. As a result, the agreement should be modernized, 
I believe, to expand North American competitiveness. Three 
trends show why.
    First, production models have changed, and we have already 
heard a little bit about that this afternoon. Our three 
countries don't just trade products together, we now design and 
make these products together. And that is to our benefit. The 
statistic has already been used; let me use it again. Every 
dollar from U.S. imports from Mexico includes some 40 percent 
of U.S. content; from Canada, it is some 25 percent. So North 
America is now the production platform.
    Second, in 1994, there was barely an Internet, as Mr. 
Dreier said. Nobody had a clue how radically electronic 
communications would fundamentally alter business models. More 
broadly, incredible technological advances have transformed 
virtually every sector in the past 2 decades, from energy, 
which we have heard about, to health care, which we have heard 
about, to financial services. The list goes on and on. 
Industries that were not even contemplated by original 
negotiators are now significant engines of growth.
    Third, there is a noticeable change in trade patterns 
within North America demarcated by 9/11, at which point the 
border thickened and commercial activities understandably took 
a second seat to security. Still, as NAFTA-facilitated trade 
has increased, infrastructure has generally languished.
    Our strategic opportunity, therefore, is to capitalize on 
our increasingly unified North American economic space and 
dynamism, particularly as Mexico advances along its reform 
agenda. An agenda for progress that we might consider, then, 
would include several elements, in some areas addressing 
challenges stemming from the original agreement, and in others 
taking note of changes in the North American production model 
and finding ways to facilitate and enhance such activities.
    As a first step, we need to find a way to get the greatest 
efficiencies from the agreement as it currently exists, from 
trucking regulations to intellectual property protections, to 
customs and regulatory harmonization, to border infrastructure. 
These are not easy issues. Some have been with us since the 
agreement was concluded. Some require additional funding.
    At the same time, were the original agreement to be 
negotiated today, it likely would not look the same. For 
example, it would have to incorporate the incredible advances 
in energy that are making North America self-sufficient, 
improving our terms of trade, while igniting a manufacturing 
reconnaissance. It would highlight and promote the rapid growth 
in services in newer industries, like biotech, that has 
occurred in the past generation, including the information 
technology revolution and cloud computing. It might incorporate 
some categories of labor mobility. It would seek ways to safely 
increase border throughput as a strategic economic issue for 
the entire United States, not just border States. And it would 
attempt to find effective ways to address rule-of-law issues, 
as former President Zedillo has written recently, or perhaps 
Mexico's most vexing challenge. We have talked a little bit 
about Canada; it also applies to Mexico.
    More broadly, the NAFTA bloc should be viewed as the basis 
for a more strategic trade policy generally. Mexican and 
Canadian entry into TPP was critical, and we have talked about 
that already. Now, to take advantage of economies of scale, we 
should also negotiate, together with Mexico and Canada, the 
free-trade agreement with the European Union. And, similarly--
and I don't think we have talked about this quite yet today--an 
early economic association among North American and Pacific 
Alliance nations, which include Mexico, Colombia, Peru, and 
Chile, would be both timely and appropriate.
    The upcoming leaders' meeting that we have talked about in 
Mexico will offer an opportunity to take stock of North America 
and to begin a process that builds on NAFTA while even updating 
it further. The leaders should commit to annual trilateral 
meetings, designating a senior official to promote progress in 
the interim. They should commit to a process that includes the 
private sector, whereby the unrealized gains from NAFTA can be 
identified and addressed and those lessons learned from the 
agreement can be directly applied elsewhere. And they should 
begin a dialogue with the leaders of the Pacific Alliance and 
other nations in the hemisphere that will advance discussions 
on hemispheric economic integration, even as the Summit of the 
Americas has lost its primary economic focus.
    Given changed circumstances both within North America and 
outside the region in larger emerging markets, such as China 
and India and others, it is time to have another look to 
determine where further progress can be made.
    Mr. Chairman, I really want to thank you again for this 
opportunity. I have appreciated it. I look forward to your 
questions. Mr. Sires, thank you very much.
    Mr. Salmon. Thank you, Mr. Farnsworth.
    [The prepared statement of Mr. Farnsworth follows:]
    
    
    
    
    
    
    
    
    
    
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    Mr. Salmon. Mr. Elliot.

  STATEMENT OF MR. MARK T. ELLIOT, EXECUTIVE VICE PRESIDENT, 
 GLOBAL INTELLECTUAL PROPERTY CENTER, U.S. CHAMBER OF COMMERCE

    Mr. Elliot. Thank you, Chairman Salmon and Ranking Member 
Sires. The U.S. Chamber of Commerce appreciates your leadership 
and the opportunity to testify on IP matters associated with 
NAFTA today.
    From the outset, I would like to state that the NAFTA has 
succeeded spectacularly in boosting cross-border trade, 
economic growth, and creating good jobs. It has proven to be 
one of the most effective and beneficial trade agreements in 
U.S. history. As we celebrate the triumph of NAFTA on its 20th 
anniversary, the U.S. Chamber of Commerce calls upon elected 
officials and business leaders in Canada, Mexico, and the 
United States to build upon this foundation in the years ahead.
    One area where particular focus is needed is that of 
intellectual property. At the time of signing, NAFTA included 
IP language that was of a high standard. However, since the 
agreement was signed, 20 years has passed, and this level of 
intellectual property protection now represents a very low bar 
by 2014 standards.
    In the past 2 years, we have highlighted industry concerns 
with the Canadian and Mexican IP environments through the USTR 
Special 301 process. In 2012, the U.S. Chamber of Commerce 
released an international IP index, which was the first-ever 
comprehensive review of national IP environments, covering 11 
key markets. The United States and the United Kingdom and 
Australia all performed well in this regard. On the other hand, 
Mexico and Canada were more closely linked to Russia, Malaysia, 
and China.
    In Mexico, we have seen some forward progression in recent 
years. The business community has been working well with the 
Mexican Government. In contrast, Canada's relatively low score 
results in wide-ranging IP problems and a distinct lack of 
action from the Canadian Government. It is fair to say that 
industry is more concerned with the IP environment in Canada 
than in Mexico. And I would like to provide a few specific 
examples of some of the Canadian issues.
    Firstly, WTO TRIPS and NAFTA require patents to be granted 
for inventions that are new, non-obvious, and useful. This is 
also known as patent utility. Over the past 8 years, the 
Canadian courts have used this clause to revoke more than 20 
pharmaceutical patents for what they call ``lack of utility or 
usefulness.'' They have justified doing so by requiring 
evidence that is wholly inappropriate for judicial review or 
patent approvals. In one instance, an innovative pharmaceutical 
company lost $500 million in revenue. This trend is not 
happening anywhere else in the world.
    Secondly, and unlike other countries, Canada has yet to 
provide ex officio authority to its customs officials to seize 
counterfeit and pirated products at the border.
    Thirdly, the business community is concerned with the 
ongoing and substantial illicit trafficking of goods across the 
U.S.-Canadian border. Counterfeiting and piracy in Canada are 
worth approximately $20 billion to $30 billion annually. This 
includes sporting goods, medicines, consumer electronics, 
automotive parts. The list is endless. Many of these 
counterfeits originate from China, and the criminal 
organizations see Canada as the easiest entry point into North 
America.
    Fourthly, if a pharmaceutical patent is successfully 
challenged by a generic manufacturer, the patent holder has no 
administrative right of appeal. However, if the patent holder 
is successful in defending the patent, the generic manufacturer 
is entitled to administrative appeal. This practice is 
discriminatory against the innovative companies.
    Lastly, Canada has failed to ratify the WIPO Copyright and 
the WIPO Performances and Phonograms Treaties, resulting in 
Canada falling below global standards of copyright.
    As mentioned, 2014 will present many opportunities for the 
United States, Canada, and Mexico to further improve their IP 
environments. As the committee is well aware, the TPP is being 
negotiated between 12 countries, and it is essential that it 
include a robust IP chapter. We would also encourage the 
Canadian Government to work closely with the business community 
to address specific IP issues within and outside the TPP and 
NAFTA frameworks and to raise their IP standards to levels 
consistent with the United States, the U.K., and Australia.
    Thank you once again for the opportunity to testify.
    Mr. Salmon. Thank you.
    [The prepared statement of Mr. Elliot follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    Mr. Salmon. Dr. Wood.

 STATEMENT OF DUNCAN WOOD, PH.D., DIRECTOR, MEXICO INSTITUTE, 
        WOODROW WILSON INTERNATIONAL CENTER FOR SCHOLARS

    Mr. Wood. Thank you, Mr. Chairman. Great pleasure to be 
here.
    I always like to say that I am the perfect NAFTA citizen. I 
lived and was educated in Canada. I then moved to Mexico to 
work for 17 years. I then have moved here to the United States. 
I have a Canadian ex-wife, not because of any intellectual 
property dispute that we had. My children were born in Mexico 
but live in Canada. And I am now married to American and am 
living and working here. But I am a citizen of none of the 
three countries. So I guess that makes me the perfect person to 
comment.
    A lot has been said about the success of NAFTA. I would 
like to talk about the potential of the North American region 
and what we need to do to realize that potential.
    I think that we see four main factors in the potential for 
North America. The fully integrated production platform is 
something that we have talked about at great length already, 
and I think we need to emphasize that. It is very, very 
important to see that we are unique in the world in the way 
that industry in the three countries works together.
    The second factor has already been mentioned, energy. North 
America's incredible energy abundance, from the massive 
hydroelectric resources and oil sands of Canada to the huge oil 
and gas reserves of the Gulf of Mexico, shale gas and tight oil 
fields on shore, and the world-class wind, solar, and 
geothermal resources of Mexico and the United States, means 
that the region's energy security is guaranteed for the 
foreseeable future.
    But it is the cost of energy that gives us the real 
advantage in the world. The shale gas revolution has meant that 
gas prices and, therefore, the cost of electricity are 
incredibly low by international standards, conferring a huge 
boost to the cost-efficiency of North American manufacturing.
    The third factor is human capital. North America has a 
demographic profile that gives it a significant long-term 
advantage over Europe, China, and Japan. The openness of Canada 
and the United States to immigration has allowed these 
countries to maintain a steady supply of young people who 
provide a workforce that satisfy labor needs.
    Mexico's traditionally higher fertility rate has meant that 
it has been a source country for many of these young people, 
but its changing demographic pattern now means that it will 
produce less migrants than in years gone by. So we have to take 
advantage of the demographic bonus while it exists. The 
challenge is how do we invest in the region's young people.
    The final factor is the internal market. We have 460 
million people in the North American economic space, and their 
spending power combined exceeds that of any other nation or 
region. Total North American GDP will rise from $19 trillion 
today to over $50 trillion by 2050, when the regional 
population is forecast to top 630 million and Mexico is 
projected to be one of the world's five largest economies.
    Mexico, with its relatively young population, a rising 
middle class, and with economic growth rates expected to 
surpass those in Canada and the United States, will generate 
the lion's share of North American growth. This will ensure 
that the domestic market in North America remains the most 
important in the world, even after Chinese GDP outgrows that of 
the United States.
    So what do we need to do to guarantee the economic future?
    First, we need to modernize and deepen North American 
integration. As has been mentioned here, NAFTA was a first-
generation trade agreement signed in another era. We need to 
update it to take into consideration all of the new products 
that have been mentioned here. We need to strengthen our 
already considerable attributes if the region is going to be 
able to compete against other countries and regions of the 
world. Harmonizing regulations and standards, introducing 
agreements on services, and coordinating economic policy more 
closely will do just that.
    Second, we must invest in our people to ensure that 
employers have the human talent they need to remain 
competitive. We need to give them the freedom to move in the 
region.
    Third, we need to invest in our borders, in both 
infrastructure and in procedures, to ensure that integrated 
production processes in the region are efficient, agile, and 
competitive.
    Fourth, we need to invest in energy infrastructure so that 
we create a fully integrated North American energy market that 
will ensure supply and keep prices low.
    Finally, we need to think about how a strong North America 
can best engage with the rest of the world.
    The potential of the TPP is considerable, but the 
negotiations must take into consideration the interests, 
strengths, and weaknesses of all three NAFTA partners. This 
means that we have to think not only about those who win from 
openness and free trade but also those who lose. How do we 
compensate those who lose their jobs or whose businesses cannot 
compete in a globalized economy? Though it is a thorny issue, 
this question must be answered adequately if we are to maintain 
political support for free markets, trade, and investment.
    I am an optimist on this one, and I agree with Fred 
Bergsten, who has estimated that the benefits to the U.S. 
economy of 50 years of free trade equal around $1 trillion in 
annual GDP and that the benefits outweigh the cost by about 20 
to 1.
    Now is the moment for the United States, Mexico, and Canada 
to celebrate open regionalism and to take the necessary 
measures to make sure that our shared regional economy is 
strong enough to compete on the world stage. The TPP is one 
path, but we must recognize that there are also encouraging 
signs at last from the World Trade Organization after 12 years 
of stagnation. If we take the necessary measures, we cannot 
only enjoy a more prosperous future but also offer an example 
that the rest of the world may follow.

    Thank you very much.
    Mr. Salmon. Thank you very much.

    [The prepared statement of Mr. Wood follows:]

    
    
    

                          ----------                              

    Mr. Salmon. I am going to recess the subcommittee so that 
we can go vote on the floor, and we will be back to ask 
questions. Thank you.
    [Recess.]
    Mr. Salmon. We will reconvene the subcommittee. And I would 
like to start off the questioning first with Mr. Farnsworth.
    How has NAFTA affected the trade balance between the three 
countries? How do energy imports affect the trade balance? And 
will Mexico's energy reforms have implications for the trade in 
energy?
    Mr. Farnsworth. Well, thank you, sir, for the opportunity.
    The trade balance is a factor of many things, not just 
NAFTA. And so a lot of times people say, well, after we passed 
NAFTA, the trade balance changed overnight almost, it seemed, 
in 1994. That was a result of the peso crisis, et cetera. So, 
at one level, it is a difficult linkage to make. What NAFTA did 
was it opened up both economies to each other.
    Clearly, energy is actually a part of that. And one of the 
things that we often hear in terms of NAFTA as a criticism is 
that the U.S. trade balance with Mexico has changed into the 
negative. A lot of that has to do with the fact that, frankly, 
we are importing energy from Mexico. We are also importing a 
lot, obviously, from Canada, which is our number-one supplier 
of energy. And so those energy relationships would occur with 
or without NAFTA. So I think we just have to be a little bit 
careful there in that context.
    But as energy reforms go through in Mexico, we think this 
is a game-changer for several reasons. Number one is because--
we have talked a little bit about the cost of energy. Energy 
right now in Mexico, electricity in particular, is really 
expensive. And from a manufacturing perspective, that is a very 
important input. As the cost of energy decreases, manufacturing 
is going to be a lot more competitive, and that builds into the 
entire idea we have all been talking about about North America 
as a production platform. But you are also going to have huge 
opportunities for U.S. investors, for the first time since 
1938, to have the opportunity, perhaps, to work directly with 
the Mexican energy sector.
    And you are also going to have opportunities for U.S. 
technology and U.S. capital to be deployed. And this is really 
important because, particularly in the context of natural gas, 
which Mexico has an awful lot of but hasn't been able to 
develop because they haven't had the technology and capital, 
these are, in some ways, environmentally sensitive issues, and 
you have to have best practices, you have to have cutting-edge 
technology, you have to know what you are doing, or else you 
can really make a mess of things. That is U.S. technology. The 
U.S. is in the lead here. And so to deploy that technology in 
the Mexican energy sector we think is a very good thing.
    So that is going to contribute very directly to the trade 
balance because, frankly, those are exports. Also, I have to 
say that will also contribute to Canada's trade balance. Those 
will be exports from Canada, too. Canada has a very robust 
energy sector.
    I would very quickly also just align myself with your 
comments about the XL Pipeline. I think that is a very 
important thing.
    And I also want to congratulate Congress, in fact, as well, 
on moving forward with the transboundary hydrocarbon agreement 
with Mexico.
    Mr. Salmon. Thank you very much.
    Mr. Elliot, as I mentioned earlier, I have some grave 
concerns about some of the IP infractions in Canada. And you 
focused a large part of your testimony on the same issue. I 
find it very disconcerting that they have appeared on USTR's 
watchlist that singles out countries where IPR is inconsistent. 
Really consistently, for the last 20 years, they have been on 
that list.
    What is the best mechanism for us to try to address it? To 
me, it is a very, very serious concern. And if we are going to 
look at new trade agreements, maybe that is where they should 
be raised. Or should they be maybe raised through the existing 
trade agreement? What are your thoughts? Because I am not going 
to let it go.
    Thank you.
    Mr. Elliot. Sure. And thank you, Chairman Salmon, for not 
letting it go. It is a very important issue to the business 
community.
    I think there are a couple of parts to this. If you break 
out the patent utility piece itself, you know, there are a 
number of different ways you can tackle that one. If the 
Canadian Government don't see an obligation through NAFTA to 
fix it, then certainly you would imagine there is an obligation 
through the EU-Canada CETA agreement to fix it. If not, there 
will certainly be through the TPP. And if not, you know, it has 
been spelled out over a number of years through the Special 301 
process; it is quite clear what the problem is.
    The frustrating aspect of this is that in the U.S., Europe, 
and Canada the law is virtually the same. There is just a very 
minor clause in there which makes the difference. And in the 
U.S. and Europe, it is defining the area as capable of 
industrial application. And the Canadian law says ``lack of 
utility.'' There are the differences in the wording of the 
legislation. It is a relatively easy fix.
    My view is that, you know, there are a number of different 
mechanisms here to put some pressure on the Canadian Government 
to act on this. I would hope that the Canadian Government would 
see the need to address it for their own purposes, and, quite 
simply, it is the right thing to do.
    Mr. Salmon. I find it kind of incredulous that some of 
these Canadian generic companies would want to offer a product 
that has no utility.
    Mr. Elliot. Yes, indeed. I mean, part of the irony here is, 
of course, if the court finds that the patent has no utility, 
then of course the generic entrant enters the market, proving 
of course there was utility after all.
    Mr. Salmon. Mr. Sires.
    Mr. Sires. I guess that is how they keep the cost of 
medicine down.
    You know, in your statement, Mr. Elliot, you said that 
China sends the counterfeit through Canada, through here. And 
how much was it that you estimate a year that comes to the 
United States through Canada?
    Mr. Elliot. There is somewhere between $20 billion and $30 
billion a year in the counterfeit business running through 
Canada at the moment.
    Mr. Sires. And that just gets passed on to us?
    Mr. Elliot. Not all of it. Not all of it. Some of that 
would. Some would remain in Canada.
    Mr. Sires. Yeah, obviously.
    Mr. Elliot. Yeah.
    Mr. Sires. But a lot of it comes to us.
    Mr. Elliot. That is correct.
    Mr. Sires. What about our border checks or anything like 
that? That doesn't come into play?
    Mr. Elliot. Yeah. There are a couple of aspects on this. I 
mean, I think there is an issue around the counterfeits 
entering Canada, and I think that is the ex officio issue here, 
where the law enforcement people don't have the authority 
without a court order to seize goods coming through.
    There was a former Canadian Ambassador to the United States 
who wrote that it is more difficult to transport a used 
mattress across the border on top of your car than a truckload 
of counterfeit products into the U.S. And there is some truth 
in that. Look, and some of this is, of course, not solely on 
Canada.
    Mr. Sires. Right.
    Mr. Elliot. There is an issue here on the U.S. side.
    But part of the frustration here, I think, is that, to some 
extent, the Canadian Government is not inspecting some of the 
materials coming from China that they believe are en route to 
the U.S. And then, of course, when it enters the U.S., the U.S. 
authorities are perhaps not applying the same sort of attention 
to it, feeling that it is coming from Canada and, therefore, 
not requiring the same level of attention as it would if it 
were coming directly from China.
    Mr. Sires. Dr. Wood, how do labor and environment 
provisions in recent free-trade agreements and reportedly in 
the TPP differ from those of NAFTA?
    Mr. Wood. Thank you.
    I think we are in a crucial moment in the TPP negotiations, 
where we are seeing the pushback on certain environmental and 
labor negotiations.
    We were fortunate enough within NAFTA to be able to create 
these side agreements that actually did help to raise 
standards, in Mexico in particular. We also developed an 
institution at the border, the North American Development Bank, 
that sought to develop the border region in an environmentally 
safe way to improve drinking water, paving. Now they are moving 
on into renewable energy and emissions, which are very, very 
important features of industrialization.
    That was something which was added into the NAFTA sort of 
after the fact, after the negotiations, but it became a crucial 
element. And I think we probably could do a lot more on that in 
NAFTA.
    What I am concerned about with TPP is that we need to make 
sure that those standards remain high. And as the piece that 
was published in the New York Times this morning highlighted, 
at the moment it seems as though the United States is backing 
off from an insistence on high environmental and labor 
standards in that agreement.
    It is an issue that is important not just in the sense of 
protecting jobs here but also in making sure that the 
development of those countries--because, ultimately, that is 
what we are looking for. We are looking for the development of 
those markets around the Pacific Basin as an outlet for U.S. 
goods. Their development needs to be sustainable in every sense 
of the word.
    And so I think that is the concern that needs to be there 
front and center. It needs to be an issue that U.S. negotiators 
have a strong stance on.
    Mr. Sires. Thank you.
    Mr. Farnsworth, how come we have such large deficits with 
some of these countries and we have this trade agreement?
    Mr. Farnsworth. Well, again, sir, it is a really good 
question because it is asked all the time. And the deficit 
itself is an accounting mechanism that isn't necessarily linked 
directly to trade agreements or not. I mean, this is a much 
broader number, if you will, and it is the flip side of 
investment numbers, et cetera, et cetera, as you would note 
from economics.
    But, having said that, what trade agreements have done, and 
it was said in the previous panel, is opened foreign markets 
that were previously closed to the United States in a way that 
is done on a reciprocal basis. And this is oftentimes really 
important because the United States has generally given 
unilateral trade preferences to our trade partners 
traditionally. And the trade agreements, actually, what they do 
is they give us equal access to those foreign markets that we 
haven't had in the past.
    And so, if we want to increase our exports, we have to find 
ways to open new markets. And that is precisely what we have 
seen, at least in the Western Hemisphere, where I know the 
stories much better, in terms of bilateral agreements with 
Chile, the bilateral agreements with Peru, the bilateral 
agreement with Colombia, with CAFTA, the Central American 
countries. And it is also what we have seen in terms of NAFTA.
    Now, the issue with Mexico right after the agreement went 
into force was--again, I mentioned it very briefly--but the 
peso devaluation, which changed the terms of trade. But that 
wasn't specifically related to NAFTA. In fact, it was NAFTA 
that locked Mexico in to a course of activity that prevented 
them from doing things that they might have done previously, as 
they did in the 1980s, to close their markets. And what NAFTA 
did is they kept those markets open. And as a direct result, 
Mexico returned to global capital markets in a matter of 
months, whereas during the crisis of the 1980s it took them 
years to get back.
    So, in fact, NAFTA was a framework that really helped 
contain the damage but also gave Mexico a ladder to get out of 
it. Now, that doesn't guarantee that every policy action every 
country takes is going to be favorable or not have negative 
consequences or, frankly, that the trade agreement is going to 
be able to ameliorate every bad thing that happens. But that is 
one way to look at some of these issues, and I think a very 
helpful way.
    Mr. Sires. Our latest trade agreement with Colombia, how is 
that working? Anyone want to----
    Mr. Wood. Yeah. I mean, the information that I have on the 
trade agreement with Colombia is that it is working quite well 
for the United States but not so well for Colombian exporters. 
They haven't been able to take advantage of the terms of that 
agreement in the same way as the United States has. And it is--
--
    Mr. Sires. They also signed a trade agreement with Canada, 
right, totaling $7 billion?
    Mr. Wood. I believe they did, yes.
    Mr. Sires. They have. So----
    Mr. Wood. But I think that one thing is that we are at the 
fortunate point of view or perspective of 20 years of NAFTA. We 
can look back. The free-trade agreement with Colombia is still 
relatively new. They take time to mature. And I think adopting 
a longer-term historical perspective is crucial in this 
question.
    Just as with your question to Eric Farnsworth just now. 
Mexico is on this development path where ultimately their terms 
of trade are going to change. They will start to import a lot 
more from the United States, just as they have done already. We 
have seen the transformation of the Mexican economy. So they 
import a lot more than they used to. And trade matters a lot 
more to Mexico than it did 20 years ago. Back then, trade as a 
percentage of GDP was at 30 percent. Now we are looking at 70 
percent of GDP related to trade. That is a huge transformation 
for the country.
    Mr. Farnsworth. If I can make just a very quick comment on 
Colombia to add to what Duncan was saying.
    The real winner in terms of the Colombia trade agreement 
has been the United States, because, again, this was an 
agreement that--Colombia had unilateral free market access into 
the United States through the original Andean Trade Preference 
Act from 1991. That was later extended and expanded into the 
ATPDEA in the year 2000. But that was always unilateral access 
that the Colombians enjoyed into the United States. What the 
U.S. didn't have was reciprocal access into Colombia, and that 
is what the FTA has granted us.
    Now, the Colombian FTA has only been in operation for a 
short period of time. And it always gives me a chuckle when you 
hear the opponents of trade agreements particularly talk about 
difficulties in, for example, the Colombian agriculture sector 
and they blame the trade agreement with the United States. But 
the terms of implementation of the agriculture provisions in 
the trade agreement haven't gone into effect yet because they 
have been backloaded in terms of transition periods, just like 
we did with NAFTA, over a 15-year period. So you get all these 
complaints sometimes about agreements, when, in fact, the 
agreement isn't even operative in those sectors.
    So Colombia, I think, is a country that we are going to see 
increasing dynamism. And what the exciting thing has been for 
that particular country is they are actually seeing the trade 
agreements with Canada and the United States and now with the 
Pacific Alliance and some of the interesting things they are 
doing in the Pacific not as the endpoint but as the beginning 
point, the access point to the global economy that then allows 
them to take the domestic reforms they need to on labor rights 
and on the environment and on education, on innovation, all the 
things we know so well, and use the trade agreement as really a 
spur to those broader national development goals.
    And, ultimately, I think that is where the people of 
Colombia want to go, and I think that is where the United 
States would want them to go, as well.
    Mr. Sires. And the South Korea trade agreement, how is that 
doing?
    Mr. Farnsworth. I am not an expert there, I am sorry.
    Mr. Sires. Okay.
    Anybody?
    Okay. Well, I guess we can end it on that.
    Mr. Salmon. All right.
    Well, that concludes our questions. We would really like to 
thank the second panel very much for taking your time. And 
sorry about the hiatus that we just had to endure, but thank 
you very, very much.
    I don't have any other comments or questions. I am actually 
very, very encouraged that NAFTA has been a very, very 
phenomenal success and a success that we can build upon with 
other FTAs. So thank you very much.
    And this hearing is concluded.
    [Whereupon, at 4:40 p.m., the subcommittee was adjourned.]
                                     

                                     

                            A P P E N D I X

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         Material Submitted for the RecordNotice deg.




               


          
   Material submitted for the record by the Honorable Matt Salmon, a 
  Representative in Congress from the State of Arizona, and chairman, 
                 Subcommittee on the Western Hemisphere




                                 
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