Free Trade Area Of The Americas: Negotiators Move Toward	 
Agreement That Will Have Benefits, Costs to U.S. Economy	 
(07-SEP-01, GAO-01-1027).					 
								 
The 34 democratic countries of the Western Hemisphere pledged in 
December 1994 to form the Free Trade Area of the Americas (FTAA) 
no later than 2005. The FTAA agreement would eliminate tariffs	 
and create common trade and investment rules among the nations of
the Western Hemisphere. When completed, the FTAA agreement will  
cover about 800 million people, more than $11 trillion in	 
production, and $3.4 trillion in world trade. The five FTAA	 
negotiating groups pursuing liberalization of trade and 	 
investment--market access, agriculture, investment, services, and
government procurement--have submitted initial proposals and	 
agreed on a date to begin market access negotiations, but the	 
groups face short-term and long-term issues. In the short-term,  
these groups must resolve a number of practical issues in order  
to begin negotiations on market access schedules no later than	 
May 15, 2002, and to narrow differences and prepare revised trade
rule chapters by August 2002. Over the long-term, these 	 
market-opening groups face fundamental questions about how much  
and how fast to liberalize. Narrowing outstanding differences may
be difficult for the four other negotiating groups, which have	 
made initial proposals on rules governing intellectual property; 
subsidies, antidumping, and countervailing duties; competition	 
policy; and dispute settlement. Some groups face fundamental	 
differences. Other negotiating groups have reached agreement on  
basic principles but disagree on key details. Two of the three	 
crosscutting themes--smaller economies and civil society--have	 
proven controversial. Because the FTAA's smaller economies are	 
concerned over their capacity to implement such a vast agreement 
and its potential economic effects on their countries, they have 
been seeking assurances of technical assistance and other special
treatment. The FTAA process has been viewed as not sufficiently  
open to the public, and past efforts to include nongovernmental  
interests, such as business, labor, the environment, and	 
academia, have been widely seen as ineffective. Some steps have  
been taken to address these concerns, and other steps are being  
considered. As a comprehensive agreement, the FTAA could have	 
wide-ranging effects on U.S. trade and investment with other	 
Western Hemisphere countries. The elimination of tariff and	 
nontariff barriers would improve U.S. market access; put U.S.	 
exporters on an equal footing with competitors in FTAA markets;  
and expand trade, particularly in highly protected sectors such  
as agriculture. On the other hand, certain protected U.S.	 
sectors, including textiles, apparel, and agricultural goods such
as sugar and citrus, may face increased import competition and	 
declining production if barriers were lowered.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-1027					        
    ACCNO:   A01753						        
  TITLE:     Free Trade Area Of The Americas: Negotiators Move Toward 
Agreement That Will Have Benefits, Costs to U.S. Economy	 
     DATE:   09/07/2001 
  SUBJECT:   Foreign trade agreements				 
	     International trade				 
	     International trade regulation			 
	     International organizations			 
	     Economic analysis					 
	     Foreign trade policies				 
	     Free Trade Area of the Americas			 
	     Agreement						 
								 
	     North American Free Trade Agreement		 
	     Generalized System of Preferences			 
	     Program						 
								 

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GAO-01-1027
     
A

Report to the Ranking Minority Member, Committee on Finance, U. S. Senate

September 2001 FREE TRADE AREA OF THE AMERICAS

Negotiators Move Toward Agreement That Will Have Benefits, Costs to U. S.
Economy

GAO- 01- 1027

Letter 1 Executive Summary 2

Purpose 2 Background 3 Results in Brief 4 GAO?s Analysis 5 Agency Comments
12

Chapter 1 14

Introduction The FTAA Is Part of a Larger Process of Economic Liberalization
and

Integration 14 Negotiators Have Succeeded in Laying the Groundwork for the

FTAA 17 Objectives, Scope, and Methodology 22

Chapter 2 25

FTAA Efforts to Open Market Access 27 Agriculture 35

Hemispheric Markets Services 41

Investment 45 Government Procurement 53

Chapter 3 57

?Other Rules and Intellectual Property Rights 58

Subsidies, Antidumping, and Countervailing Duties 64 Institutional
Provisions

Dispute Settlement 69 Competition Policy 75

Chapter 4 78

FTAA Efforts to Smaller Economies 78 E- commerce 82

Address Crosscutting Civil Society 84

Themes

Chapter 5 89

FTAA Would Secure Liberalization of Merchandise Trade Would Bring New
Opportunities for U. S. Exporters and Increased Competition in

and Expand Trade Some Protected U. S. Sectors 93

Access and Rights for Comprehensive FTAA Offers New Opportunities in
Services,

the United States Investment, Intellectual Property Rights, and Government

Procurement 106 Appendixes

Appendix I: U. S. Trade and Investment With Countries in the Western
Hemisphere 113 U. S. Trade and Investment With FTAA Countries Grew Rapidly
113 U. S.- FTAA Merchandise Trade Was Dominated by Machinery and

Transport Equipment; Agriculture Was a Relatively Small Share 116 Travel and
Transportation Were the Largest Sectors in U. S.

Cross- Border Trade in Services 119 U. S. Investment in FTAA Countries
Nearly Evenly Split Between

FDI, Stocks, and Bonds 120

Appendix II: GAO Contacts and Staff Acknowledgments 122 GAO Contacts 122
Acknowledgments 122

Tables Table 1: Overview of Market- opening Negotiating Groups 26 Table 2:
Overview of Negotiating Groups on Other Rules and

Institutional Provisions 58 Table 3: Overview of Crosscutting Themes in the
FTAA Negotiations 78

Table 4: Average Tariff Rates for All Agricultural and Industrial Goods 95
Table 5: Trade- weighted Tariff Averages for U. S. Imports From FTAA
Countries 100

Table 6: Share of Imports Facing Different Ranges of Tariff Rates for Each
FTAA Regional Group, 2000 100 Table 7: Top U. S. Export and Import Sectors
by Regional Group,

2000 117 Figures Figure 1: Growth of Extra- regional, Intra- regional, and
World

Trade, 1990- 99 16

Figure 2: FTAA Negotiations, 1994- 2001 18 Figure 3: Organization of the
FTAA Negotiations 19 Figure 4: FTAA Time Frames and Milestones, 2001- 05 21
Figure 5: FTAA Countries? Average Applied Tariff Rates on

Merchandise Imports 28 Figure 6: Share of U. S. Foreign Direct Investment
and Portfolio (Stock and Bonds) Investments in FTAA Countries,

1999 46 Figure 7: U. S. Merchandise Trade With Key Trade Partners, 2000 90
Figure 8: U. S. Trade in Services With Key Trade Partners, 1999 91 Figure 9:
The Stock of U. S. Foreign Direct Investment in Key Trade

Partners, 1999 92 Figure 10: Antidumping Cases Initiated and Defended, by
FTAA Country, 1987- 2000 104

Figure 11: Share of U. S. Merchandise Trade With FTAA Regional Groups, 2000
114 Figure 12: U. S. Foreign Direct Investment, Merchandise Trade, and

Services Trade With Non- NAFTA FTAA Countries, 1990- 2000 115 Figure 13:
Share of U. S. Exports to FTAA Countries, by Sector,

2000 116 Figure 14: Share of U. S. Imports From FTAA Countries, by Sector,

2000 118 Figure 15: Share of Service Subsectors in U. S.- FTAA Trade, 1999
119

Abbreviations

CACM Central American Common Market CARICOM Caribbean Community ECLAC United
Nations Economic Commission for Latin America and the Caribbean

EU European Union FDI foreign direct investment FTAA Free Trade Area of the
Americas IDB Inter- American Development Bank IPR intellectual property
rights Mercosur Common Market of the South NAFTA North American Free Trade
Agreement OAS Organization of American States SPS sanitary and phytosanitary
measures TNC Trade Negotiations Committee TRIMS Agreement on Trade- Related
Investment Measures TRIPS Trade- Related Aspects of Intellectual Property
USTR U. S. Trade Representative WIPO World Intellectual Property
Organization WTO World Trade Organization

Executive Summary Purpose The Free Trade Area of the Americas (FTAA)
agreement would eliminate

tariffs and create common trade and investment rules among the 34 democratic
nations of the Western Hemisphere. 1 When completed, the FTAA agreement will
cover about 800 million people, more than $11 trillion in production, and
$3.4 trillion in world trade. Because of its scope, negotiations toward such
an agreement are among the most significant of ongoing regional trade
negotiations for the United States, and the Bush administration has made
establishing the Free Trade Area of the Americas one of its top trade
priorities. We reported in March 2001 2 that the April

2001 Trade Ministerial in Buenos Aires, Argentina, and the Summit of the
Americas in Quebec City, Canada, offered an opportunity to inject political
will and set an ambitious pace for the current, more difficult phase of the
negotiations, when hard bargaining is expected to begin. In May 2001, we
testified before the Subcommittee on Trade, House Committee on Ways and
Means, that negotiators had succeeded in attaining these goals but that
fundamental challenges remain. 3 Among these challenges are bridging

differences on a number of complex and controversial topics. Because of the
significance of the Free Trade Area of the Americas initiative, you asked us
to report on the current status of negotiations on specific topics and the
agreement?s potential effect on the United States. In this report, we
address (1) the progress made to date and the issues that remain on topics
relating to negotiating greater market opening among

FTAA countries, (2) the progress made and the issues that remain in
developing other rules and institutional provisions for an eventual FTAA
agreement, (3) the significant crosscutting themes affecting the FTAA
negotiations and how have they been addressed to date, and (4) the potential
effects of a completed FTAA on U. S. trade and investment with other Western
Hemisphere countries. Our observations are based on our past and ongoing
work on the Free Trade Area of the Americas process.

1 The 34 countries participating in FTAA negotiations are Antigua and
Barbuda, Argentina, the Bahamas, Barbados, Belize, Bolivia, Brazil, Canada,
Colombia, Chile, Costa Rica, Dominica, the Dominican Republic, Ecuador, El
Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico,
Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St.
Vincent and the Grenadines, Suriname, Trinidad and Tobago, the United
States, Uruguay, and Venezuela. 2 See Free Trade Area of the Americas:
Negotiations at Key Juncture on Eve of April Meetings (GAO- 01- 552, Mar.
30, 2001). 3 See Free Trade Area of the Americas: April 2001 Meetings Set
Stage for Hard Bargaining to Begin (GAO- 01- 706T, May 8, 2001).

Background Building on a decade of expanding trade and investment ties in
the region, the leaders of 34 countries in the Western Hemisphere pledged in
December 1994 to form a Free Trade Area of the Americas no later than 2005.
At the first Summit of the Americas in December 1994, hemispheric

leaders agreed that free trade and increased economic integration of
production and consumption are key factors in raising standards of living,
improving working conditions, and protecting the environment. The leaders
resolved to form an FTAA that would progressively eliminate barriers to
trade and investment. The FTAA would involve a diverse set of countries,
from some of the wealthiest (the United States and Canada) to some of the
poorest (Haiti) and from some of the largest (Brazil) to some of the
smallest in the world (St. Kitts and Nevis).

In 1998, the 34 participating countries formally launched negotiations
toward the FTAA at the San Josï¿½ Ministerial (Costa Rica) and the Santiago
Summit (Chile). The countries agreed on the guiding principles for the
negotiations and the mandates for nine negotiating groups: (1) market
access; (2) agriculture; (3) services; (4) investment; (5) government

procurement; (6) intellectual property rights (IPR); (7) subsidies,
antidumping, and countervailing duties, which are measures to counter
imports that are sold at below cost or that involve financial benefits from
governments; (8) dispute settlement; and (9) competition (antitrust) policy.
The countries also formed special committees to address the crosscutting

themes of smaller economies, electronic commerce (e- commerce), and the
participation of civil society. The completed FTAA agreement will include
the following: trade rules, which each negotiating group is currently
negotiating; market- opening schedules to be negotiated by five groups; and

a general text to cover overarching and institutional issues. In April 2001,
heads of state and government agreed to conclude the FTAA negotiations no
later than January 2005 and to seek implementation of the agreement no later
than December 2005. The negotiating groups have produced a draft text
containing trade rules, among other

accomplishments. These drafts compile and consolidate proposals received
from FTAA participants. Because these proposals diverge in many ways, hard
bargaining will be required to produce consensus on the final FTAA
agreement. During the current negotiating phase (May 2001- Oct.

2002), FTAA participants will agree on how to conduct the market- opening
negotiations by April 1, 2002, begin these negotiations no later than May
15, 2002, and produce a new version of their text by August 2002. Since the
FTAA ground rules call for a ?package deal,? and since nothing is final
until

everything has been agreed upon, much can happen between now and the
scheduled conclusion of the negotiations.

Results in Brief The five FTAA negotiating groups pursuing liberalization of
trade and investment- market access, agriculture, investment, services, and

government procurement- have submitted initial proposals and agreed on a
date to begin market access negotiations, but the groups face short- term
and long- term issues. In the short- term, these groups must resolve a

number of practical issues in order to begin negotiations on market access
schedules no later than May 15, 2002, and to narrow differences and prepare
revised trade rule chapters by August 2002. For example, how countries
should identify which service sectors to include in the terms of the
agreement must first be resolved before negotiations to liberalize services
can begin. Over the long term, these market- opening groups face

fundamental questions about how much and how fast to liberalize. For
example, some FTAA countries want FTAA agriculture provisions to liberalize
trade by reducing or eliminating domestic supports, which are payments
provided to farmers that raise or guarantee prices or income.

However, the United States wants these measures to be addressed at a
multilateral, not regional, level. For tariffs, the questions will be if
there are to be product exclusions and how fast to phase- in the elimination
of tariffs on covered products, a particularly sensitive topic for certain
sectors such as agriculture and apparel that are vulnerable to import
competition.

Narrowing outstanding differences may be difficult for the four other
negotiating groups, which have made initial proposals on rules governing
intellectual property; subsidies, antidumping, and countervailing duties;
competition policy; and dispute settlement. Some groups face fundamental
differences. For example, proposals for antidumping vary widely, ranging

from maintaining the current World Trade Organization (WTO) rules as
preferred by the United States, to eliminating antidumping measures once
free trade is achieved. Other negotiating groups have reached agreement on
basic principles but disagree on key details. For example, there appears to
be wide agreement about the key steps in the FTAA dispute settlement
process, but differences remain regarding how to handle compliance and
whether to allow appeals.

Two of the three crosscutting themes- smaller economies and civil society-
have proven controversial. Because the FTAA?s smaller economies are
concerned over their capacity to implement such a vast agreement and its
potential economic effects on their countries, they have been seeking
assurances of technical assistance and other special treatment. The FTAA
ministers have agreed to address these concerns but not how they will do so.
The second controversial theme concerns civil society. The FTAA process has
been viewed as not sufficiently open to the public, and past efforts to
include nongovernmental interests, such as business, labor, the environment,
and academia, have been widely seen as

ineffective. Some steps have been taken to address these concerns, and other
steps are being considered. For example, in July 2001 the draft FTAA text
was made publicly available. 4

As a comprehensive agreement, the FTAA could have wide- ranging effects on
U. S trade and investment with other Western Hemisphere countries. The
elimination of tariff and nontariff barriers would improve U. S. market
access; put U. S. exporters on an equal footing with competitors in FTAA
markets; and expand trade, particularly in highly protected sectors such as
agriculture. As the world?s largest exporter of services; largest source of
direct investment; and a major creator of software, pharmaceuticals, and
other knowledge- based industries; the United States could benefit
substantially from commitments from other FTAA countries to liberalize
services and strengthen protection of investment and IPR. On the other

hand, certain protected U. S. sectors, including textiles, apparel, and
agricultural goods such as sugar and citrus, may face increased import
competition and declining production if barriers were lowered.

GAO?s Analysis Negotiators Are Set to Begin

Five FTAA negotiating groups are market- opening groups established to
Market- opening develop schedules for reducing tariff, nontariff, and other
barriers to trade

Negotiations and to draft chapters outlining associated trade rules. To
date, each of the

five has submitted a draft text on their respective rules, but they have yet
to begin negotiations on liberalization schedules. In reaching consensus and
4 The draft FTAA text can be accessed on the FTAA Internet site at www.
ftaa- alca. org/ Alca_ e. asp.

beginning negotiations on schedules, each group faces complex and often
controversial issues.

 Market access- The largest of the negotiating groups, market access,
includes the elimination of industrial tariffs and nontariff barriers and
related topics. The bulk of the FTAA?s market- opening opportunities will be
determined through tariff schedule negotiations. The most difficult task in
these negotiations will be dealing with sensitive sectors that are

vulnerable to competition from imports. Before negotiators can begin tariff
schedule negotiations, they must reach agreement on several issues, such as
the starting point or base tariff rate used to apply scheduled reductions.
This is important because starting from a higher point will have the effect
of delaying the liberalization of trade. They

also must reach agreement on a number of other complex issues, including the
rules that determine whether a product is eligible for FTAA preferences, the
types of customs procedures the FTAA should contain, and the design of a
?safeguard? mechanism that allows increased

protection for industries when imports surge.  Agriculture- Both the United
States and other FTAA countries view

expanding access to agricultural markets as one of their top trade
priorities, but they disagree on three major issues. First, FTAA countries
must decide whether they wish to address domestic support payments to
farmers such as market- price support programs, loan deficiency

payments, and commodity loan programs. The United States, which currently
uses domestic support payments but competes in world commodity markets with
the European Union (EU), believes that domestic supports can only be
addressed at a global level and not in a regional trade agreement. Second,
once tariff negotiations begin in May

2002, FTAA countries must decide how to treat import sensitive agricultural
products. Often, a sensitive product from one country (such as orange juice
in the United States) is a competitive product for another country (Brazil).
Third, while FTAA countries have agreed to eliminate export subsidies in the
region, they have not agreed on how to deal with subsidized products from
countries outside of the region or whether to create rules to discipline
their own export subsidies to other regions.

 Services- As the world?s largest exporter of services such as
telecommunications, the United States could benefit greatly from
negotiations within the FTAA on the liberalization of services trade.
Negotiators on services have made progress developing a draft chapter

on services but several issues remain to be resolved. They need to make
decisions concerning whether the coverage of the chapter should include when
a company provides services through a commercial presence in another
country, which is also considered an investment issue. Also, negotiators
must develop the structure for producing the individual country schedules of
market access commitments. For example, negotiators must decide whether the
approach for

liberalization will be a top- down or "negative" list approach, which
assumes that all sectors are covered by the agreement unless specifically
excluded, or a bottom- up or "positive? list approach, which covers only
those sectors specifically included in a country?s schedule. The United
States supports the negative list approach, arguing that it would lead to
more ambitious liberalization.

 Investment- The United States has a keen interest in the FTAA negotiations
on investment, not only because it is one of the largest foreign investors
in Latin America, but because it has investment agreements in force with
only 10 of the 33 other FTAA participants. The

investment negotiators have reached broad agreement on the overall thrust of
the chapter and the nature of many of its provisions, but they diverge on
the coverage of the FTAA?s investment rules. The United States is seeking a
comprehensive agreement that covers all forms of investment as well as an
agreement that addresses certain labor and environmental issues associated
with investment. Some other countries are opposed to taking such a broad
approach. The U. S. proposals on

labor and environment to the investment group initiated larger debates over
the inclusion of language on labor rights and environmental standards in the
FTAA. Investment is also at the center of a debate over the proper balance
between corporate rights and the public interest.

 Government procurement- Valued at approximately $250 billion, the Western
Hemisphere?s government procurement market offers potentially great market-
opening opportunities. Only four of the FTAA

countries- the United States, Canada, Mexico, and Costa Rica- are party to
an international government procurement agreement that sets out predictable
procedural rules enabling foreign suppliers to compete

on an equal footing with domestic suppliers. Negotiators on government
procurement are challenged by the fact that many countries have little
experience with procurement disciplines. The government procurement group
will have to reach consensus on whether the FTAA?s rules on government
purchases should require the use of specific

procedures for announcing and awarding bids or simply contain broad

principles. The group must also agree on the government entities that will
be covered by such disciplines. Other Negotiating Groups In addition to the
five market- opening groups, FTAA countries are Develop Rules and

developing rules on IPR; subsidies, antidumping, and countervailing duties;
Institutional Provisions

dispute settlement; and competition policy. Each of these four negotiating
groups has developed a draft of their respective chapters. The drafts, as
with the five market- opening groups, are heavily bracketed, with brackets
denoting text that is still in dispute. Currently, the groups vary in the
extent

of their divergence. Negotiators in the IPR and subsidies and antidumping
groups differ on important principles. On the other hand, negotiators in
dispute settlement and competition policy have reached broad agreement but
differ over details. Some of the more significant differences in each

group follow:  Intellectual property rights- Because the United States
maintains a decisive competitive advantage in high- technology, knowledge-
based

industries that are dependent on IPR, this is one of the most important
topics for U. S. negotiators. FTAA countries have somewhat divergent
interests in this area. Developed countries want to bolster enforcement of
existing rules and cover new technologies, such as the Internet and
biotechnology. Developing countries, despite wider recognition of the
importance of IPR to fuel innovation and investment, are reluctant to go
beyond existing trade and IPR treaties and face the need to build
enforcement capacity. Certain issues within the negotiations, such as
compulsory licensing and the patenting of plants, animals, and

biological processes, may also prove controversial.  Subsidies,
antidumping, and countervailing duties- An area that is likely to be
contentious throughout the course of the negotiations is the use of
antidumping and countervailing duties. Many countries in the

Western Hemisphere employ these trade remedies to counter subsidized or
unfairly traded imports. The United States has been an active proponent of
their use. However, some countries believe that these measures are
inappropriately protectionist. FTAA countries proposed widely varying draft
text on this issue. The United States, in a controversial move, proposed
that countries be able to maintain their current antidumping and
countervailing duty laws as permitted under the WTO. However, other
countries proposed to limit these measures or eliminate the use of trade
remedies altogether once free trade is achieved.

 Dispute settlement- Effective provisions for settling disputes will help
ensure that the FTAA?s commitments are met. Crafting these provisions will
require members to balance a desire for a strong regional enforcement
mechanism against national concerns about sovereignty. While negotiators
agree on much of the broad framework of the dispute settlement process, they
disagree over details such as how to handle compliance, whether to allow
appeals, and the extent to which the process should be open to outside
parties. FTAA negotiators also must determine the relationship between the
FTAA?s dispute settlement process and other international agreements.

 Competition policy- Competition policy is a new area for most countries in
the Western Hemisphere, as only 12 of the 34 participating countries
currently have competition policy laws. While the 34 participants have
agreed that members of the FTAA should implement measures that proscribe
anticompetitive business conduct such as

monopolistic behavior, they differ over the level of detail necessary to
promote the effective development of competition policy laws and agencies at
the national or subregional level. The participants also have not agreed on
the type of dispute settlement mechanism that should be used to settle
disputes over implementation of the competition policy chapter.

Ministers Take Steps to FTAA participants have taken steps to incorporate
into FTAA negotiations Address Crosscutting

three crosscutting themes: smaller economies, electronic commerce, and
Themes

civil society. These "non- negotiating? groups do not produce text for the
FTAA agreement. They serve as a forum for discussion and a source of
information on issues that reflect challenges arising from the diversity of
FTAA participants, the need to respond to emerging technologies, and the

support and concern that the trade negotiations attract from a range of
societal interests.

 Smaller economies- Although there is no agreed definition of what
constitutes a smaller economy, by various measures, up to 25 of the 34 FTAA
countries could be considered to have smaller economies. FTAA ministers have
agreed that the FTAA should take into account differences in size and
development. However, negotiators have not reached agreement on what form
any special treatment will take or

which countries will qualify for it. The United States would like to address
these issues on a case- by- case basis, while other participants feel this
may exclude them from receiving certain special considerations

that they might receive under a more categorical approach. In addition, FTAA
countries are seeking technical assistance to help them participate in the
negotiations and implement the obligations of the eventual agreement.

 Electronic commerce- E- commerce involves the use of information
technology and telecommunications networks to produce and sell products.
Because fostering a supportive environment and maintaining a liberal trading
regime for e- commerce are goals of FTAA nations, they

have created a forum to share information. E- commerce issues also arise in
several areas of the FTAA negotiations, such as the exchange of goods and
services and the protection of intellectual property. The

FTAA could result in commitments that provide a more open and predictable
environment for this promising technology.

 Civil society- The FTAA?s comprehensive scope has attracted interest from
a number of civil society groups representing nongovernmental interests,
such as business, labor, the environment, and academia. Recognizing the
importance of these groups, the ministers created a mechanism for receiving
the views of civil society through a formal submission process. However,
civil society representatives complained

that the FTAA process was not open enough to allow meaningful input, and
that the input they had provided had not been adequately considered. In
Buenos Aires, FTAA ministers began to address these

complaints by (1) agreeing to publicly release the draft negotiating text,
(2) directing that the civil society submissions be transmitted to the
appropriate negotiating groups, and (3) mandating the exploration of other
ways to focus and sustain communications with civil society. The

draft FTAA agreement is now available on the Internet in all four official
languages of FTAA negotiations (English, French, Portuguese, and Spanish).
FTAA Would Expand Market

Although the scope of the FTAA has yet to be determined, a comprehensive
Access and Other Rights for agreement could have wide- ranging effects on U.
S trade and investment the United States in the

with other Western Hemisphere countries. Currently, this trade and Western
Hemisphere, but

investment is substantial and growing. Some Industries May Be

 Elimination of tariff and nontariff barriers would provide greater market
Adversely Affected

access for U. S. exporters. Although FTAA countries have significantly
reduced tariff barriers over the past decade, average tariff rates still

remain over 10 percent for many countries. Agricultural tariffs tend to be
even higher for most FTAA countries.  FTAA tariff elimination also could
fix problems faced by U. S. exporters

whose competitors receive more favorable treatment through preferential
trade agreements. For example, Canadian forest products, wheat, vegetable
oils, and potatoes receive duty- free access into the Chilean market through
the Canada- Chile Free Trade Agreement, while U. S. products generally face
a 8- percent duty. The EU is also negotiating free trade agreements with
Chile and Mercosur (comprised of Argentina, Brazil, Paraguay, and Uruguay)
to gain duty- free access to those markets, which the United States
presently does not enjoy.

 Since the U. S. market is already relatively open for FTAA countries, many
U. S. imports will face little change. Eighty- seven percent of U. S.
merchandise imports from these countries entered the United States duty-
free in 2000, and trade- weighted average U. S. tariffs on imports from FTAA
countries were less than 1 percent.

 Some U. S. products remain protected through high tariffs, tariff- rate
quotas, quotas, and other measures. Removal of these barriers for some
products, such as textiles and apparel, sugar, peanuts, and citrus, would

likely increase competition, lower prices, and reduce production,
potentially displacing some U. S. firms and workers.

 Liberalization of trade in services would benefit highly competitive U. S.
service providers in such sectors as finance and telecommunications. In the
WTO, FTAA countries have generally made very limited commitments to open
their service markets. Although some countries have begun to unilaterally
liberalize their markets and privatize some industries, these changes are
not bound by a trade agreement with the United States. The U. S. market for
services is already relatively open, although some sectors, such as maritime
services, are restricted.

 Investment is increasingly interconnected with trade as companies set up
processing plants in multiple countries to supply goods and services for
their worldwide operations. The United States is the world?s largest source
of long- term investment and, in 1999, had accumulated investment valued at
$265 billion in FTAA countries. However, the United States has in force
investment treaties protecting investor rights with only 10 of these
countries. Brazil, the second largest recipient of U. S. foreign direct
investment after Canada, does not have a bilateral

treaty with the United States. An FTAA investment chapter would guarantee
specific rights to foreign investors and would require all participants to
give foreign investors these specific rights.

 As a world leader in the creation and production of original works and
intellectual content in fields ranging from motion pictures and software to
pharmaceuticals and plant varieties, the United States would

generally benefit from improvements in the protection of IPR through the
FTAA. Establishment of FTAA principles on intellectual property could also
increase exports of U. S. products embodying intellectual content.

 Finally, government procurement is an area in which the United States has
no multilateral or bilateral commitments with FTAA countries outside of the
North American Free Trade Agreement, which applies to Mexico and Canada. As
many FTAA countries? government operations make up important shares of their
economic activity, improved access to procurement markets elsewhere in the
hemisphere would provide new opportunities for U. S. exporters of goods and
services.

Agency Comments We obtained oral comments on a draft of this report from the
Assistant USTR for the Americas. USTR generally agreed with the information
in the report and provided technical comments that we incorporated as
appropriate.

Chapt er 1

Introduction In December 1994, the heads of state and government of the 34
democratic countries in the Western Hemisphere agreed at the first Summit of
the Americas in Miami, Florida, to conclude negotiations to create a Free
Trade Area of the Americas (FTAA) no later than 2005. 1 These negotiations
are an extension of the economic reform and integration that has occurred in
much of the hemisphere over the past decade, fueling increased trade and

investment within and outside of the region. Since then, the FTAA trade
ministers have established a framework for the FTAA negotiations and
negotiators have begun drafting the text of the agreement.

The FTAA Is Part of a The FTAA negotiations were initiated within the
context of ongoing

Larger Process of unilateral liberalization in many countries. Following a
serious debt crisis, sluggish economic growth, and spiraling inflation in
the 1980s, most Latin

Economic American economies shifted their economic strategies from
protected,

Liberalization and state- assisted industrialization to externally oriented,
export- driven

Integration development. These strategies included lowering trade barriers
and taking steps to attract foreign investment. As a result, economic growth
doubled,

rising from 1.7 percent on average in the 1980s to 3.4 percent in the 1990s;
inflation decreased significantly; and trade expanded rapidly. 1 The 34
countries participating in FTAA negotiations are: Antigua and Barbuda,
Argentina, the Bahamas, Barbados, Belize, Bolivia, Brazil, Canada, Colombia,
Chile, Costa Rica, Dominica, the Dominican Republic, Ecuador, El Salvador,
Grenada, Guatemala, Guyana,

Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St.
Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname,
Trinidad and Tobago, the United States, Uruguay, and Venezuela.

All but 1 of the 34 nations participating in FTAA negotiations are members
of the World Trade Organization (WTO), which sets trade rules on a global
basis through a process of multilateral negotiations among its members.

As part of their economic liberalization programs of the past decade,
countries in the Western Hemisphere have also pursued economic integration
through numerous free trade and customs union agreements. 2 The largest
trading bloc outside of the North American Free Trade Agreement (NAFTA) is
Mercosur, which comprises Brazil, Argentina, Paraguay, and Uruguay. Other
regional blocs include the Caribbean Community and Common Market (CARICOM),
3 the Andean Community, 4 and the Central American Common Market (CACM). 5
Countries in the

region, particularly Mexico and Chile, have concluded numerous bilateral
free trade and investment agreements with others in the region. These
subregional agreements provide greater access for industrial goods and

have sometimes covered agriculture, services, and investment. 6 Countries in
the Western Hemisphere also are making agreements with those outside of the
hemisphere. Mexico recently concluded a free trade agreement with the
European Union (EU), and Chile and Mercosur are negotiating their own
bilateral free trade agreements with the EU. Trade among Latin American
countries and between Latin America and the rest of the world expanded
rapidly during the 1990s. Overall trade by the region grew by 10.8 percent
annually on average, outpacing world trade growth (6. 6 percent) over the
same period. However, intra- regional trade between members of the same
trade blocs grew faster than extra- regional 2 Free trade agreements
generally eliminate tariff duties and other barriers on substantially all
trade between the member countries and may include other provisions covering
subjects such as investment and government procurement. Customs union
agreements go beyond free trade agreements by eliminating duties between
partners and by setting common external tariffs that are applied to
countries not party to the agreement.

3 The CARICOM?s members are Antigua and Barbuda, the Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St.
Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. 4 The Andean
Community?s members are Bolivia, Colombia, Ecuador, Peru, and Venezuela.

5 The CACM?s members are Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua. 6 Some subregional agreements exclude provisions on agriculture
altogether. Although the U. S.- Canada Free Trade Agreement, Mercosur, and
CARICOM agreements all include agriculture provisions, they also exclude
sensitive products such as sugar, dairy, poultry, and eggs. The services
area is relatively new for trade agreements. Investment has been covered in
free trade agreements and through bilateral stand- alone agreements.

trade. This was particularly true for Mercosur and the Andean Community,
where intra- regional trade grew twice as fast as extra- regional trade.
Trade within Latin America as a whole also grew faster than trade between
Latin America and the rest of the world (see fig. 1).

Figure 1: Growth of Extra- regional, Intra- regional, and World Trade, 1990-
99 Percentage

12

11. 1

10

8.0

8

6.6

6 4 2 0

Intra- regional Extra- regional

World trade trade

trade Source: Inter- American Development Bank.

Although the 1990s was a decade of continued reform and expanded trade, new
challenges arose. For example, Mexico and Brazil both faced serious
financial crises in 1995 and 1998, respectively- Hurricane Mitch devastated

parts of Central America in 1998, and the Andean region has struggled with
political instability and effects of the drug trade. Also, Argentina has
been mired in recession and has recently faced its own financial crisis.
Despite reforms, many countries still face high unemployment rates and wide
disparities between the wealthy and the poor. These economic and social

obstacles create challenges for continued reform, economic development, and
liberalization.

The prospects for the FTAA agreement, which evolved out of the reform
process, will be affected by how well countries resolve these challenges. At
the same time, a successfully concluded FTAA agreement may help secure the
liberalization that has already taken place and extend it to new

areas. Beyond these economic benefits, the FTAA is widely regarded as a
centerpiece of efforts to forge closer and more productive ties among
Western Hemisphere nations, increase political stability, and strengthen

democracy. While the FTAA should provide benefits, it may also adversely
affect certain sectors. In addition, some labor and environmental groups are
concerned that potential FTAA provisions may reduce the ability of countries
to set and enforce high standards for health, safety, and the environment.
As in the case with other international trade agreements, the FTAA has also
drawn the attention of organizations and individuals

apprehensive about increased globalization of international economic
activity.

Negotiators Have Some progress has been made in the FTAA process, including
building a

Succeeded in Laying technical foundation for FTAA negotiations. At the March
1998 San Josï¿½ Ministerial, ministers agreed on guiding principles for the
FTAA. An

the Groundwork for organizational structure and objectives for negotiations
were established,

the FTAA and overall and interim deadlines were set. Since then, draft
chapters reflecting proposals on the topics under negotiation have been
prepared.

Milestones for progress in the current negotiating phase have been set, but
challenges remain, including bridging differences on key topics. FTAA
Progress to Date Since beginning the process in 1994, the 34 participating
countries have succeeded in building a technical foundation for the
negotiations. As

shown in figure 2, from December 1994 to March 1998, participants developed
guiding principles for FTAA negotiations. For example, they agreed that all
decisions in the FTAA negotiating process would be made by consensus and
that the FTAA would be a single undertaking, meaning that the agreement
would be completed and implemented as a whole rather

than in parts. They also agreed that the FTAA agreement would (1) be
consistent with the rules and disciplines- or practices- of the WTO; (2)
improve WTO rules and disciplines whenever possible and appropriate;

and (3) coexist with other subregional agreements, such as Mercosur and
NAFTA, to the extent that the rights and obligations of those agreements go
beyond or are not covered by the FTAA. They also reached consensus on the
overall structure, scope, and objectives of the negotiations. The

participating countries then formally initiated the negotiations in 1998 at
the San Josï¿½ Ministerial and the Santiago Summit of the Americas.

Figure 2: FTAA Negotiations, 1994- 2001 1994 1995 1996

1997 1998 1999 2000 2001 Develop structure, scope, and

Prepare Prepare

organization of negotiations annotated

draft text outlines

Initiate Trade Negotiations

December 1994 March 1996

March - April 1998 Summit of the

Second Ministerial Fourth Ministerial

Americas Cartagena, Colombia

San Jose, Costa Rica April 2001

Miami, Florida Sixth Ministerial

Second Summit Buenos Aires, Argentina

Santiago, Chile Third Summit Quebec City, Canada

June 1995 May 1997

November 1999 First Ministerial

Third Ministerial Fifth Ministerial

Denver, Colorado Belo Horizonte, Brazil

Toronto, Canada Source: GAO.

FTAA Organizational The FTAA negotiations are organized into nine
negotiating groups and four Structure

special committees and overseen by the vice- ministerial level Trade
Negotiations Committee (TNC) (see fig. 3). The ministers set out the
workplans for the negotiating process and select new chairs for the
negotiating groups and committees in 18- month cycles. The chairmanship of
the negotiations changes at the start of each 18- month negotiating cycle,
with Ecuador serving as chair for the current cycle of negotiations. Brazil
and the United States are set to co- chair the final cycle from November
2002 to December 2004.

Figure 3: Organization of the FTAA Negotiations Chairman of the Negotiations

(Ecuador)

Trade Negotiations Committee

Vice- ministers of Trade Tripartite

(Ecuador) Administrative Committee

a Secretariat b

Guide negotiating groups and develop overall framework for the agreement

Negotiating groups Other FTAA entities

Market access Investment

Services Consultative Group

(Argentina) (Mexico)

(Caribbean Community) on smaller economies

(Bolivia) Progressively eliminate

Establish a fair and Progressively tariffs and nontariff

transparent legal liberalize

Committee on barriers

framework to promote trade in services

Civil Society investment

(Dominican Republic) Government procurement

Dispute settlement Subsidies, antidumping, Committee of experts (Costa Rica)

(Paraguay) countervailing duties

on Electronic Commerce (Peru)

(Canada) Expand access to Establish a fair, government procurement

transparent, and Enhance WTO compliance

markets effective dispute and improve application of

Technical Committee on settlement mechanism

trade remedy laws Institutional Issues (Brazil)

Agriculture Intellectual property rights Competition policy (Guatemala)

(United States) (Colombia) Eliminate export subsidies,

Promote and ensure Ensure anticompetitive address tariffs and other

adequate and effective business practices trade- distorting practices;

protection of intellectual do not undermine SPS measures

property rights FTAA benefits Legend: SPS = Sanitary and phytosanitary
measures. These measures are taken to protect human, animal, or plant life
or health.

Note 1: Current chairs of the various FTAA entities are in parentheses. The
general objectives of each negotiating group and the Trade Negotiations
Committee appear in italics.

Note 2: The venue for the actual negotiations, currently in Panama City, was
initially located in Miami and will rotate to Mexico City in March 2003.

a The Tripartite Committee, which provides technical support to the
negotiations, is comprised of the Organization of American States, the
Inter- American Development Bank, and the United Nations Economic Commission
for Latin America and the Caribbean.

b The Administrative Secretariat supports the FTAA ministers, the Trade
Negotiations Committee, negotiating groups, and other FTAA entities. Source:
GAO analysis of FTAA data.

In preparation for the Buenos Aires Ministerial in April 2001, the
negotiating groups produced a first draft text on their specific issues. The
draft text is heavily bracketed, 7 indicating that agreement on specific
language has not been reached. Nevertheless, the draft text will form the
basis for future negotiations, which are expected to narrow differences on
the range of proposals currently under consideration.

Milestones Set for Current At the April 2001 Buenos Aires Ministerial and
Quebec City Summit, FTAA

Phase of FTAA Negotiations countries set out objectives and interim
deadlines to promote the progress of the negotiations during the current 18-
month negotiating cycle (May

2001 to Oct. 2002), which will culminate at the next trade ministerial to be
held in Ecuador (see fig. 4). Ministers also set specific goals and
timetables for the current cycle:

 To move toward consensus on draft rules, ministers directed negotiating
groups to consolidate text and eliminate- to the maximum extent possible-
material that is in dispute.

 To prepare to begin negotiations on market access schedules, ministers
instructed specific groups to develop recommendations by April 1, 2002, on
the methods and modalities (basic ground rules) for these negotiations. 
The ministers also asked the groups to develop, where appropriate,

inventories by April 2002 of tariffs, nontariff barriers, subsidies, and
other practices that distort trade.  The ministers directed negotiating
groups to initiate negotiations on market access schedules no later than May
15, 2002.

7 The term ?bracketed? refers to the punctuation placed around language in
the draft chapters for which agreement has not yet been reached. For
example, if two countries submitted different proposals for language in a
chapter, brackets would be placed around each proposal until a consensus is
reached on the differences between the two.

In addition, heads of state and government agreed at the Quebec City Summit
to conclude the negotiations no later that January 2005 and to seek the
entry into force of the agreement no later than December 2005. Figure 4:
FTAA Time Frames and Milestones, 2001- 05 April 3- 6, 2001

April 7, 2001 April 20- 22, 2001

January 2005

Buenos Aires, Buenos Aires,

Quebec City, Deadline to conclude

Argentina: Argentina:

Canada: FTAA negotiations

Vice- ministers Fifth FTAA

Third Summit of

April 2001 - 2005

make final ministerial

the Americas

December 2005

preparations for the

Entry into force ministerial

of FTAA

April 2002 May 2002

August 2002 October 2002

Set modalities Begin market

Submit revised Next ministerial in

for market access access

draft text Ecuador

negotiations Source: GAO analysis.

Despite this progress, numerous challenges remain. Among them are technical
and substantive differences on the nine topics being negotiated. Chapter 2
of this report addresses five of the nine topics being addressed in

an FTAA that relate to market opening: market access, agriculture, services,
investment, and government procurement. Rules are also being developed on
four other trade topics, which are addressed in chapter 3, including
intellectual property rights (IPR); dispute settlement; subsidies,
antidumping, and countervailing duties; and competition policy. Three

special committees provide input to the TNC on crosscutting themes- namely,
the treatment of smaller economies, civil society, and electronic commerce
(e- commerce), which are addressed in chapter 4. Chapters 2, 3,

and 4 provide an overview of the topic or theme and its importance, describe
the mandate of the group and its progress to date, identify controversial or
otherwise important issues, and discuss next steps. Chapter 5 discusses the
potential effect of a completed FTAA on U. S. trade and investment with
other Western Hemisphere countries. Appendix I presents information on U. S.
trade and investment with the 34 countries negotiating the FTAA.

Objectives, Scope, and Our objectives for this report were to describe (1)
the progress made to

Methodology date and the issues that remain in negotiating greater market
opening among FTAA countries, (2) the progress made to date and the issues
that remain in developing other rules and institutional provisions for an

eventual FTAA agreement, (3) the significant crosscutting themes affecting
the FTAA negotiations and how have they been addressed to date, and (4) the
potential effects of a completed FTAA on U. S. trade and investment with
other Western Hemisphere countries.

To address the first three objectives, we reviewed executive branch
documents, related publications, and economic literature, and we held
discussions with lead U. S. government negotiators for each FTAA negotiating
group. We also reviewed FTAA documents, including the draft FTAA agreement.
We had discussions with foreign government officials representing each of
the major negotiating blocks and with officials from the Inter- American
Development Bank (IDB), the Organization of American States (OAS), and the
United Nations Economic Commission for Latin America and the Caribbean
(ECLAC), collectively known as the Tripartite Committee, which provides
technical support to the negotiations. We reviewed formal comments about the
FTAA that were made in response to Federal Register notices and submitted to
the Office of the U. S. Trade

Representative (USTR). We also met with experts on the FTAA and
international trade negotiations and representatives from business and civil
society groups that have expressed interest in the FTAA process. In
addition, we traveled to Buenos Aires, Argentina, to take part in the

Americas Business Forum and Academic Colloquium associated with the FTAA
Trade Ministerial and attended public briefings by USTR and the Department
of State for civil society representatives.

To address the fourth objective, we analyzed U. S. and regional trade and
investment data from 1990 to 2000, current U. S. and regional trade
barriers, and market- distorting government policies. We also examined the
extent to which FTAA countries were members of multilateral and bilateral
trade

and investment agreements with the United States. U. S. merchandise trade
data came from Department of Commerce official trade statistics. Exports
were measured in terms of domestic exports at ?free alongside ship? value.
Imports were measured in terms of imports for consumption at customs value.
U. S. services trade and investment data came from the Bureau of Economic
Analysis? Survey of Current Business. World trade data came from the United
Nations international trade database. U. S. tariff data came

from the U. S. International Trade Commission. Some tariff rates are given
as specfic rates of duty (e. g., $5 per bushel) rather than ad valorem
(percentage of value) rates. Ad valorem equivalent rates are conversions of
specific rates to ad valorem rates, which allow average tariff rates to be
calculated. To the extent that they were available from the International
Trade Commission, these rates were used in the calculation of overall
average tariff rates. U. S. trade and tariff data were analyzed at the
eightdigit

level of detail based on the harmonized system. For determining U. S.
imports subject to duties, the tariff schedule was combined with
disaggregated trade data that identified imports by preferential trade
program. Other FTAA countries? average tariff rates came from the World Bank
and the IDB. In some instances, these organizations calculated different
average tariff rates for the same country in the same year. For example, the
World Bank lists Uruguay?s average tariff rate at about 4.5

percent in 1999, while the IDB reports an average tariff rate at above 12
percent. For consistency, we reported World Bank calculated tariffs, unless
they were not available for a particular country. In that case, we

reported IDB tariff rates. We relied on reports by the International Trade
Commission on U. S. services trade; the International Trade Commission and
the United Nations on U. S. and world investment; and the WTO, OAS, IDB, and
ECLAC on each of the negotiating areas. We did not estimate an economywide
model of the overall effects of the FTAA. We did review economic studies
that analyze some aspects of FTAA liberalization in an economywide
framework. We also did not estimate the impact of an FTAA on production,
labor, and prices overall or for individual sectors of the U. S. economy.

For all four objectives, we relied on our past and ongoing work on trade
liberalization in the Western Hemisphere. 8 Because FTAA negotiation ground
rules only allow countries to divulge their own positions, this report
generally does not name the countries holding particular positions unless
officials from those countries told us that it was acceptable to do so. We
acknowledge that we analyzed the FTAA from the U. S. perspective, not that
of other countries participating in the process. Finally, given the
relatively

early stage of FTAA negotiations, and the recent emergence of key
information, such as a public version of the draft agreement, U. S. civil
society groups and the public that either favor or oppose the FTAA are
likely to be forthcoming with more concrete positions on FTAA negotiating

topics. For example, USTR issued a Federal Register notice on July 12, 2001,
soliciting specific views from the public on the draft FTAA agreement, 9 but
these comments were not received in time to be reflected in this report.

We conducted our work from September 2000 through August 2001 in accordance
with generally accepted government auditing standards. 8 Early developments
in the FTAA process are discussed in Trade Liberalization: Western
Hemisphere Trade Issues Confronting the United States (GAO/ NSIAD- 97- 119,
July 21, 1997). 9 Federal Register, Vol. 66, No. 134, pp. 36614- 36615, July
12, 2001. Comments were due to USTR by August 22, 2001.

Chapt er 2

FTAA Efforts to Open Hemispheric Markets The five FTAA groups charged with
negotiating market- opening opportunities- market access, agriculture,
services, investment, and government procurement- have drafted rules and are
now developing the databases and methods that they will use to schedule the
reduction and elimination of trade barriers among FTAA participants. Each
group faces a number of issues. The market access group has the broadest set
of responsibilities, including tariff and nontariff barriers for industrial
goods;

rules of origin; customs procedures; and technical barriers to trade, such
as product standards. Also, before this group can begin negotiations on
tariff elimination- one of the principal goals of a free trade area- it must
agree on which tariff rates to use as a starting point. The agriculture
group faces many controversial issues in its discussions, including whether
to include domestic support payments to farmers (subsidies) in the FTAA
agreement and how to treat sensitive products. The services negotiating
group faces tough choices on the scope, structure, and timing of
liberalization. Discussions on investment reveal broad agreement on many
basic principles, but they also reveal differences on coverage, investor-
state dispute settlement, and labor and environmental provisions. Finally,
government procurement is a relatively new area for many FTAA

participants and presents both opportunities in terms of market opening and
challenges in terms of common experience. The group also must resolve
differences over how prescriptive FTAA rules should be. Table 1

provides an overview of the five FTAA groups charged with negotiating
market- opening opportunities. The remainder of this chapter describes each
of these topics, its importance, and the group?s negotiating mandate;

progress to date; significant issues; and next steps. Information on the
potential economic impact of trade liberalization for these topics can be
found in chapter 5.

Table 1: Overview of Market- opening Negotiating Groups Significance for the
United Topic States Mandate Next steps

Market access Interregional industrial trade of Progressively eliminate
November 2001 - Complete trade database.

about $650 billion; tariff and nontariff barriers. high regional tariff and
nontariff

April 2002 - Agree on modalities. barriers; broadest scope of any
negotiating group.

May 2002 - Begin tariff negotiations. August 2002 - Submit revised text.
Agriculture Top trade priority for many FTAA Progressively eliminate

April 2002 - Agree on modalities. countries; U. S. exports could

tariffs on agricultural increase by $1. 5 billion; high tariffs goods,
eliminate export May 2002 - Begin tariff negotiations. for sensitive
products.

subsidies, address other trade distorting practices; August 2002 - Submit
revised text. sanitary and phytosanitary measures.

Services United States is world?s leading Progressively eliminate

April 2002 - Agree on modalities. services exporter; many FTAA barriers to
trade in countries are new to services

services. May 2002 - Begin services negotiations. liberalization.

August 2002 - Submit revised text. Investment United States is one of the
largest

Establish a fair and April 2002 - Agree on modalities. foreign investors in
Latin America; transparent legal other countries see FTAA rules as framework
to promote May 2002 - Begin tariff negotiations.

way to attract foreign investment. investment.

August 2002 - Submit revised text. Government Potentially great market-
opening

Expand access to April 2002 - Identify scope of needed statistical
procurement opportunities. government procurement information. markets.

April 2002 - Agree on modalities. May 2002 - Begin tariff negotiations.
August 2002 - Submit revised text. Source: GAO analysis.

Market Access Topic, Importance, and

The market access negotiating group is crafting the rules and tariff
Negotiating Mandate elimination schedules for intraregional trade in
industrial products, which was approximately $650 billion in 1999. Through
these market access negotiations, the United States is seeking to eliminate
trade barriers and

related impediments that restrict U. S. exports of goods to the hemisphere.
Tariff barriers for FTAA countries on this trade, although falling, are
still generally high, with applied tariffs of many FTAA countries set at
rates

double the U. S. average of 4.8, as shown in figure 5. Other impediments,
such as inefficient customs procedures, can also hinder trade. The market
access group covers a greater number of issues than any of the other eight
negotiating areas. Its broad scope includes the elimination of industrial

tariff and nontariff measures, rules of origin, safeguards, customs
procedures, and standards and technical barriers to trade. 1 These issues
affect whether a product can be imported, the ease with which the import

occurs, and whether the product receives a preferential tariff rate. Trade
ministers charged this negotiating group with a mandate to produce an
agreement that progressively eliminates tariffs and nontariff barriers and
other measures that restrict trade between participating countries. 1 Rules
of origin are the production or processing requirements a product must meet
to qualify as a product eligible for tariff preferences. Safeguard measures
are suspensions of tariff elimination commitments or increased duties used
to address injury to a domestic industry due to increased competition from
tariff liberalization. Standards and technical barriers to trade are
provisions that set requirements or restrictions on imported products to
achieve domestic regulatory goals, such as the protection of human health
and safety.

Figure 5: FTAA Countries? Average Applied Tariff Rates on Merchandise
Imports

Uruguay Canada United States

El Salvador Costa Rica Guatemala

Honduras Jamaica Paraguay Dominica Island Antigua and Barbuda Trinidad and
Tobago St. Vincent & the Grenadines

St. Kitts & Nevis Panama

Belize Grenada Island

Suriname St. Lucia Island

Bolivia Chile Mexico Guyana Nicaragua

Argentina Ecuador Colombia Venezuela

Peru Brazil Barbados Dominican Republic

0 2 46 810121416 Percentage

Note 1: Average tariffs are the simple average ad valorem rate applied
across all products. Data are for the most recent year available, mostly
1998 or 1999. Data for the Bahamas and Haiti are only available for the
years before 1997 and are not included in this figure.

Note 2: Some countries may have preferential agreements with other FTAA
countries and face lower average tariff rates than those listed in the
table. For example, U. S. goods face preferential rates in Canada and
Mexico. USTR estimated that trade- weighted Mexican tariffs on U. S. goods
were 1.3 percent in January 2000.

Sources: Inter- American Development Bank and the World Bank. Progress to
Date During the last 18- month negotiating period, the group compiled draft
proposals for the rules governing market access issues. Participants have
noted that all regional groups have been active in this process, which has
been challenging, given the broad scope of the market access group. The
resulting 113- page draft text includes a range of proposals, some of which
are similar to WTO multilateral disciplines, while others recommend wholly
new measures. The texts on rules of origin and safeguards, in particular,
will be specifically tailored to a regional agreement.

Significant Issues The market access group will ultimately produce three
major products: a chapter on the overall rules covering market access,
detailed country schedules for tariff liberalization, and detailed rules of
origin. To meet these objectives, negotiators will need to cover a wide
range of topics over the next 18 months. They will decide on the parameters
for eliminating tariff and nontariff barriers and then begin negotiations on
market access schedules. These decisions will affect the speed at which
countries remove their barriers to FTAA imports. In addition, the
negotiators will draft commitments on the other areas under their mandate.
Rules of origin,

which will determine how products qualify for FTAA preferential rates, will
likely be complex to negotiate and potentially controversial for certain
products. To craft a regional safeguard mechanism to protect industries
harmed by surges in imports, negotiators will need to address countries?
desire to provide temporary relief for seriously trade- affected industries
without making it too easy to create new barriers to trade. Finally, as
tariff barriers are reduced, burdensome customs procedures and potentially
restrictive technical standards could become important impediments to
importing into a particular market. Tariff and Nontariff Barriers Tariff and
nontariff barriers are the principal policy tools countries use to

protect domestic markets. The FTAA negotiating group on market access is
responsible for conducting the negotiations to eliminate tariffs on trade
among the 34 countries. Before substantive negotiations can begin on the

elimination of tariffs on specific goods, however, participating countries
must agree on the methods and modalities, or ground rules, they will follow
during later negotiations. FTAA countries must agree on the following:  The
base rate or starting point from which tariffs will be reduced.

This issue involves reaching consensus on whether to use current (applied)
rates, bound rates, or some other measure as the base from which to start
negotiating. Current or applied rates are the tariff rates a country
currently levies on particular goods. Bound tariffs are the maximum duties
that a country has committed in the WTO to apply on those goods. Under WTO
rules, a country may increase its applied rates up to but no higher than its
bound rates. In practice, applied rates are often significantly lower. FTAA
countries must determine the starting point, or base rate, from which
tariffs will be eliminated. The higher this initial starting point, the
longer it may take for actual tariff reductions to be realized. For example,
if countries use the bound rate as the starting

point, they may not be required to cut their applied rates until later in
the reduction period. 2 However, if the applied rate is used as the starting
point, then importers will see liberalization within the first years of the
agreement. To ensure that phased duty reductions produce genuine market
openings, the United States is proposing that the base rate from which
tariffs are phased out be the lower of either a product?s most favored
nation applied rate in effect during the FTAA negotiations

or the WTO bound rate at the end of the FTAA negotiating process.  Pace of
tariff elimination. This issue aims to define the process and timing used by
countries to reduce a product?s tariff to zero. A common approach is to
divide goods into baskets. For example, the tariffs on one basket of goods
could be reduced to zero in 5 years, another basket in 7 years, and a third
in 10 years. According to WTO rules tariffs must be eliminated on
substantially all products within 10 years. The United States has proposed
that products be grouped into three baskets with tariffs eliminated either
immediately, in 5 years, or in 10 years for the most sensitive.

2 For example, a country with a bound rate of 50 percent and an applied rate
of 10 percent would, in the first year of a 5- year reduction period, be
required to charge a tariff no greater than 40 percent although it would
only actually charge 10 percent. In the second year, the bound tariff rate
would fall to 30 percent, while the actual charge stays at 10 percent, and
so on. In the final year, the country would reduce its tariff from 10
percent to zero. Therefore, since the country could continue charging its
applied rate of 10 percent on that particular product until the last year,
no actual liberalization would be realized until the fifth year.

 Reference period for trade data. Negotiators must decide what years of
trade data will be used to calculate each country?s concessions on a trade-
weighted basis and to identify which countries have been the primary
suppliers of particular products over the reference period. If a country is
a major supplier of a product, it may be entitled to special status in the
negotiations on that product. This issue will be negotiated with the
assistance of a database that is being compiled on tariff rates and
information on trade flows from 1997 to 2001. The database is expected to be
ready by November 1, 2001. The database also will be

useful for countries in determining their negotiating priorities by
providing information on current trade and tariff levels. Rules of Origin
FTAA negotiations on rules of origin requirements may be complex and

sensitive. These requirements will determine whether a product qualifies for
tariff preferences under the FTAA. For example, they may require that for a
certain product to be considered from the FTAA region, at least 60 percent
of its value must come from FTAA countries? labor, parts, and production.
Negotiations on rules of origin may be complex if they are specified
differently for specific products and entail unique requirements. Also,
origin rules may be more restrictive for some sensitive products. For
example, under two unilateral trade programs, the United States recently
offered tariff preferences for import- sensitive apparel imports, but only
if producers use certain U. S.- made fabrics and materials to produce them.
3 Rules of origin are intended to ensure that the benefits of a free trade

agreement primarily accrue to the countries covered by the agreement.
However, the more restrictive the requirements are for particular products,
the more difficult it is for exporters to qualify for the preferential duty.
Restrictive rules of origin requirements have been identified as a reason
why some exporters do not fully use special tariff preferences offered to
them. 4

3 These benefits are offered to certain Caribbean and sub- Saharan African
countries under the Caribbean Basin Trade Partnership Act (2000) and the
African Growth and Opportunity Act (2000)- see the Trade Development Act of
2000, P. L. 102- 600, Title II and Title I, respectively. Some American
textile firms support this type of rule of origin for the FTAA because they
argue that it encourages the use of U. S.- produced yarns and fabrics in
apparel products.

4 See International Trade: Comparison of U. S. and European Union Preference
Programs (GAO- 01- 647, June 8, 2001).

Negotiators must agree upon the types of origin requirements they will use
in the FTAA agreement. There are generally two types of origin requirements.
The first are value tests, which confer origin on the basis of the
percentage of value added in a country. For example, a value test may

confer origin if at least 60 percent of the worth of a product comes either
from FTAA inputs or the production process in an FTAA country. The second
type of origin requirement is the tariff shift approach. This approach
confers origin if the production process transforms a product and

its inputs enough to classify it as a different product in the tariff
schedule. For example, a tariff shift approach might confer origin if a
final product, such as a washing machine, is categorized differently on the
tariff schedule than its individual parts. With the tariff shift approach,
countries also must decide at what level of detail on the tariff schedule
the shift takes place and whether to make those decisions on a product- by-
product basis. For example, two products may be in the same aggregate
grouping, such as automobiles and auto

parts, but they may be in different groups at a more detailed level. The U.
S. unilateral preference programs, such as the Generalized System of
Preferences, generally follow a value- added approach, while NAFTA generally
uses a tariff shift approach. Several Latin American trade agreements have
used a combination of a value- added approach with a

tariff shift approach at one uniform level of detail. The United States
supports a tariff shift approach for the FTAA, but without a uniform rule
for the level of detail for the shift. U. S. negotiators argue that the
tariff shift approach is less complicated and burdensome to administer than
the valueadded approach, and that the level of detail at which the shift
takes place should depend on the type of product.

Safeguard Measures Negotiators have the challenge of crafting a safeguard
mechanism that meets FTAA countries? desire to provide temporary assistance
to industries seriously injured by increased regional competition without
making it too easy to erect new trade barriers. Safeguards are temporary
measures that either freeze or roll back trade liberalization when it is
shown that the

liberalization has caused injury to a domestic industry. These measures are
intended to provide the industry with time to adjust to increased
competition. However, if these measures are too easy to apply, they can
potentially extend protections that the agreement intended to remove. The
draft FTAA text includes a variety of proposals that cover (1) the

procedures a country must follow to use a safeguard measure; (2) the degree
of injury or impact on the domestic industry that must be shown; (3) the
types of measures that could be applied (e. g., tariff or quotas); and (4)
the length of time the measures can stay in place. Many proposals draw on
the WTO safeguard measure, which allows for tariffs or quotas to be used

for up to 4 years 5 if increased quantities of imports can be shown to cause
or threaten to cause serious injury to a domestic industry. The United
States has proposed that the FTAA only allow tariffs, not quotas, to be used
(as in NAFTA), for up to 3 years, if imports are shown to be a substantial
cause or threat of serious injury to a domestic industry. Also, the United
States has proposed that FTAA safeguard measures would only be available

for countries during a 10- year transitional period. Negotiators also must
decide whether FTAA countries may be exempted in certain circumstances if
other FTAA countries use the WTO safeguard mechanism. In addition, countries
may decide to negotiate separate sector- specific safeguards that would
provide separate rules for a particular product or sector, such as textiles.
Customs Procedures Negotiating customs procedures within a trade agreement
in the Western

Hemisphere is a new and challenging undertaking. Other trade agreements,
including the WTO, have had few concrete applications in this area. Thus,
many of the countries involved in the FTAA process lack

experience in this subject. Other challenges include the countries? human
capital and institutional capacity for implementing customs procedures and
the overhaul of laws and procedures necessary to enforce these proposals. 5
The WTO safeguard provision allows the measures to be extended to 8 years
when it can be shown that the safeguard measure continues to be necessary
and that the industry is adjusting.

The San Josï¿½, Costa Rica, Ministerial provided FTAA negotiators with a
mandate to simplify customs procedures to facilitate trade and reduce
administrative costs and also to promote customs mechanisms and

measures to ensure that these operations be conducted with transparency,
efficiency, integrity, and responsibility. The proposals as of July 3, 2001,
in the bracketed text include proposals on transparency and information

dissemination, automation, and combating fraud and other illicit
customsrelated activities. However, some countries have wanted to include
only general customs principles, not specific policies.

The major objectives of the United States include transparency of customs
procedures and their administration, establishment of an advance customs
rulings regime, institution of a review and appeals process for customs
decisions, and improvement of customs processing. To achieve these
objectives, the United States has proposed that (1) the customs procedures
chapter require all FTAA countries to make publicly available information

regarding customs laws, regulations, guidelines, procedures, and rulings;
(2) countries be required to provide a system for issuing advance rulings
before importing a good, including determinations of tariff classification,
customs valuation, or country of origin; and (3) a two- step entry process
separate the release of merchandise from final payment of duty, thereby
reducing time and costs associated with processing. The FTAA negotiators
have much work to do to reach consensus on

customs procedures. Some countries reportedly view many of the proposals in
the draft text as too politically sensitive, (e. g., proposals on
anticorruption measures); others as technologically inappropriate for some
nations to adopt (e. g., automation); and others as too burdensome.

Standards and Technical Barriers Standards and technical barriers to trade
can be very significant to

to Trade exporters because, despite tariff elimination, products still may
be denied

access if they fail to meet certain technical requirements. The WTO
Agreement on Technical Barriers to Trade preserves the rights of countries
to apply restrictions on imports for human health, safety, or environmental

reasons while establishing procedures for avoiding measures that
discriminate against imports unnecessarily. FTAA countries must decide if
they want to apply additional rules in this area through the FTAA agreement.
New rules may impact the balance between domestic regulatory interests and
the elimination of trade barriers. The United States has not yet submitted a
proposal in this area because it continues to develop its position on
whether certain new disciplines would be appropriate. Proposals in the draft
text are numerous and diverse and

reflect FTAA countries? domestic perspectives on regulation. Countries may
decide that additional rules are useful for expanding existing WTO
commitments or that additional notifications and consultations are necessary
when such measures involve FTAA partners.

Next Steps During the current 18- month negotiation phase, the market access
group will face a challenging workload, including negotiating the schedules
of tariff elimination, drafting detailed rules of origin, and reducing
differences in the draft text on the market access rules. Ministers
specifically tasked

the group at the April 2001 Ministerial to complete the hemispheric database
on current applied and bound tariff rates by November 1, 2001;

 compile a preliminary inventory of nontariff measures along with a
methodology for removing them by April 1, 2002;  intensify negotiations on
a safeguard regime and submit a report on

their progress to trade ministers by April 1, 2002;  decide the methods and
modalities for negotiating the tariff schedules and rules of origin by April
1, 2002; and

 begin negotiations on tariff schedules and rules of origin by May 15,
2002.

The hemispheric database and preliminary inventory will provide negotiators
with information on each country?s current tariff and nontariff barriers
that will be used in negotiating their elimination. The trade ministers also
instructed the market access group to coordinate with the negotiating group
on agriculture since both groups will be negotiating the modalities and
country- specific schedules to eliminate tariffs on their respective
products. Agriculture Topic, Importance, and

Agriculture is one of the most hotly debated issues in the FTAA Negotiating
Mandate

negotiations. According to the U. S. Secretary of Agriculture, the FTAA
could expand U. S. agricultural exports to the hemisphere by more than $1. 5
billion annually. The U. S. Department of Agriculture?s Economic Research
Service estimates that an FTAA could increase agricultural exports and

imports and increase agricultural income for almost every FTAA country. FTAA
countries view agriculture as a top trade priority, with each

maintaining offensive and defensive interests. The United States, for
example, would like to see increased access to South American grain markets
but maintains high tariffs on sugar and orange juice and provides U. S.
farmers with domestic support payments on a number of products. Chile, on
the other hand, does not provide its farmers with domestic supports 6 but
maintains a price band system for wheat, wheat flour, vegetable oil, and
sugar that is designed to insulate domestic markets from international price
fluctuations.

FTAA agriculture negotiators seek to move beyond WTO obligations in the
hemisphere by further reducing and eliminating tariffs and nontariff
barriers, eliminating export subsidies, addressing other trade- distorting

practices, and facilitating the implementation of the WTO sanitary and
phytosanitary (SPS) agreement. 7 The Negotiating Group on Agriculture,
established by the San Josï¿½ declaration, was given several mandates to meet
these goals. Because the agriculture and market access groups are closely
related, the ministers decided that the objectives of the market access
group should also apply to the negotiating group on agriculture. This means
that the agriculture group will work to progressively eliminate

tariffs and nontariff barriers, all agricultural tariffs will be subject to
negotiation, and different trade liberalization timetables may exist.
However, ministers agreed that rules of origin, customs procedures, and

technical barriers to trade involving agriculture would be addressed solely
in the market access group. The agriculture group was also mandated to (1)
eliminate agricultural export subsidies affecting trade in the hemisphere,
(2) identify and address other trade- distorting practices for

agricultural products, and (3) ensure that SPS measures are applied
consistently with the WTO SPS agreement. (See ch. 5 for more information on
the economic impact of tariff reductions for agricultural products.)

Progress to Date To date, the agriculture group has prepared a 45- page
draft text that presents a range of proposals on market access for
agricultural goods,

6 Domestic supports are payments made to farmers that raise or guarantee
prices or income. They include such measures as market- price support
programs, loan deficiency payments, and commodity loan programs. 7 The SPS
agreement under the WTO establishes rules on member countries? measures to
protect the life and health of humans, animals, or plants. Under the
agreement, such measures must be based on a scientific assessment of risk
and should not be applied

arbitrarily or in a way that constitutes a disguised restriction to trade.

export subsidies, other practices that distort trade in agriculture, and SPS
measures. The group is working toward agreement on this draft text and must
also prepare schedules for the reduction of agricultural tariffs, nontariff
barriers, export subsidies, and other trade- distorting practices.

Before they can begin negotiations on the schedules, they must decide how to
conduct these negotiations. Significant Issues The agriculture group faces
four significant issues. FTAA countries have not agreed on whether the
agreement will address domestic supports. They also have not determined
whether sensitive agricultural products will receive exceptions in the
tariff negotiations. While FTAA countries have agreed to eliminate export
subsidies within the hemisphere, they have not determined how to address
third- party export subsidies. Finally, while all FTAA countries seek the
full implementation of the WTO SPS agreement, they have not agreed on how to
treat it within the text of the FTAA.

One controversial issue within the agriculture group is the issue of whether
to include domestic support programs in the negotiations on other trade-
distorting measures. 8 Some countries have proposed that the FTAA go

beyond the current WTO agreement on agricultural domestic supports by
reducing and eliminating some supports that are currently permitted. 9 These
countries feel that that much of their trade protection comes in the

form of tariffs, and, if they eliminate tariffs, their products would be
disadvantaged in the face of subsidized products. Brazilian officials have
been particularly vocal on the issue of domestic supports, declaring that
the negotiations could not proceed if the United States refuses to address

domestic support programs. The United States, however, has publicly stated
that commitments to domestic support reduction can only be achieved in
multilateral negotiations, such as those in the WTO. U. S. negotiators argue
that because U. S. competitors, such as the EU, employ such supports,
reducing them in the FTAA instead of the WTO would

amount to unilateral disarmament. At least one other country has a similar
position on this issue. This impasse has led several FTAA experts to
conclude an FTAA agreement on agriculture will depend on progress made

in addressing domestic support in the WTO. 10 Once the agriculture group
begins tariff and nontariff negotiations, negotiators must determine how to
handle each country?s sensitive sectors. There has been no discussion on
specific agricultural products beyond the San Josï¿½ declaration, which states
that all products will be subject to negotiation. Two FTAA experts reported
that they expect certain products will receive special treatment in the
negotiations, such as longer phase- out 8 The draft text on other trade-
distorting practices also contains proposals that seek to reduce or
eliminate export taxes and state trading enterprises.

9 The WTO agriculture agreement classifies agricultural domestic support
measures into three categories identified by "boxes": green (permitted),
amber (reduce), and blue (production limiting programs). For the WTO, most
of the domestic support measures considered to distort production and trade
fall into the amber box. Thirty WTO members, 8 of whom are FTAA participants
(Argentina, Brazil, Canada, Colombia, Costa Rica, Mexico, the United States,
and Venezuela), have commitments to reduce their trade- distorting amber box
supports. One proposal within the FTAA draft text would eliminate some of
these supports.

10 The Uruguay Round agreements set up a framework of rules and began
reductions in protection and trade- distorting support. Article 20 of the
agriculture agreement committed members to begin negotiations on further
reforms at the end of 1999. These negotiations are now in their second
phase. Further substantial reductions in tariffs, domestic support, and
export subsidies are prominent issues in the negotiations.

periods or outright exceptions to tariff elimination. Others have stated
that they oppose exceptions to tariff elimination for agricultural products.
The issue of product exceptions will be controversial because many of the
products that are sensitive to one country are strong exports for another.
For example, Brazil has called for increased access to the U. S. orange
juice market and is a major producer of sugar, two products for which the
United States maintains relatively high tariffs. However, both industries
have asked U. S. negotiators to exclude their products from the
negotiations. In

addition, portions of the U. S. fruit, vegetable, and beef industries have
requested some degree of product exception. Although ministers have agreed
to eliminate export subsidies in the hemisphere, they have not reached
agreement on how to handle third- party export subsidies, nor have they
agreed on what constitutes an export subsidy. If they eliminated their own
subsidies within the hemisphere, they would face a disadvantage in the face
of third- party countries that use

export subsidies on products coming into the hemisphere. Similarly, FTAA
countries disagree on whether they need to create rules on the use of export
subsidies outside of the hemisphere. Solutions proposed so far

have included negotiating with third parties not to apply their subsidies,
suspending tariff preferences, and allowing for the option of fines if
export subsidies are used in either of these situations. Some FTAA countries
want to go beyond the definition of an export subsidy currently used by the
WTO

agreement on agriculture to include other programs, such as export credits,
credit guarantees, insurance programs, and food aid. The United States,
however, has proposed using the WTO definition of export subsidies. The
United States does not want export credits; export credit guarantees or
insurance programs, when provided in a manner consistent with WTO

rights and obligations; and international food aid to be considered to
constitute export subsidies for purposes of the FTAA, but it does call for
the staged elimination of exclusive export rights granted to state trading
enterprises (such as the Canadian Wheat Board).

FTAA countries have agreed to fully implement the WTO SPS agreement but have
not agreed on how best to accomplish that goal. Some countries have put
forward proposals that would include a detailed rewrite of the WTO SPS
agreement in the FTAA text. Instead, the United States has proposed that
FTAA countries agree to strengthen collaboration on matters within the
purview of the WTO SPS committee and relevant international bodies. The
United States also seeks agreement from FTAA countries to exchange
information on new research data and risk assessment procedures and to
coordinate technical assistance. In addition, several

U. S. agriculture groups have identified SPS issues that they would like
addressed within the context of an agreement. For example, the National
Cattlemen?s Beef Association has called for the full eradication of foot-
andmouth disease in the hemisphere.

Next Steps Ministers directed the agriculture group to undertake several
actions in the next negotiating phase, including establishing modalities for
marketopening negotiations, beginning the market access negotiations, and
intensifying efforts to resolve differences in the draft text. Among other
things, ministers instructed the group to

 develop recommendations on the modalities for tariff negotiations by April
1, 2002, in order to begin these negotiations by May 15, 2002;  accelerate
the process of identifying nontariff measures so as to have,

by April 2002, a preliminary inventory of such measures;  submit
recommendations on the scope and methodology for eliminating

export subsidies affecting trade in agricultural products in the hemisphere
by April 1, 2002;  make recommendations on the types of measures and a
methodology to

develop disciplines on the treatment of all other practices that distort
trade in agricultural products by April 1, 2002;  establish a notification
and counter- notification for SPS measures by

April 2002 and develop mechanisms to facilitate the full implementation of
the WTO SPS agreement; and  submit a new version of the draft text by
August 2002.

According to FTAA experts, many similar proposals in the text could be
consolidated during this negotiating phase. This could result in a text that
has more clearly stated positions by next August. Still, these experts
believe that while the group may be able to negotiate away many of the

brackets by consolidating and eliminating redundancies, it is doubtful that
they will be able to resolve the major issues. Finding common ground on the
methods and inventories for negotiating export subsidies and other trade-
distorting practices, including domestic supports, may be challenging. Latin
American countries are looking for some progress on export subsidies in
April 2002 before they proceed with the tariff negotiations. Specifically,
they would like to see a commitment from the United States to negotiate
domestic support.

Services Topic, Importance, and

As the world?s leading exporter of services ($ 253 billion in 1999) and with
Negotiating Mandate its market for services relatively open, 11 the United
States has a broad interest in liberalizing services trade across most
sectors. The FTAA negotiations include a range of service sectors, including
telecommunications, financial, professional, distribution, and travel and
tourism services. Although the services negotiating group has made progress,
substantive negotiations lie ahead on key topics, including the

scope, structure, and timing of market- opening commitments. Many FTAA
countries have just begun to liberalize their service sectors, and most have
made limited multilateral commitments to open their markets. For example, an
OAS study found that, except for Argentina, Canada, and the United States,
all other countries in the FTAA made moderately low to very low service
commitments in the WTO. However, many service sectors, such as
telecommunications and distribution, are

important to a domestic economy?s overall productivity and development.
Liberalizing these service sectors can foster greater competition and
efficiency. Some countries, such as Argentina, Brazil, and Venezuela, have
privatized previously state- owned service monopolies as part of their
economic reform plans, and some subregional trade agreements, such as those
among Mercosur and the Andean Communities countries, call for

negotiations to liberalize services trade. FTAA trade ministers agreed that
the mandate of the negotiating group on services is to establish disciplines
that will progressively liberalize trade in services and create a free trade
area under conditions of certainty and transparency. (See ch. 5 for more
information on the economic impact of hemispheric services liberalization.)

Progress to Date Over the 18 months leading up to the ministerial of April
2001, the services negotiators compiled a 38- page draft text of proposals
covering the scope and provisions of the services chapter of the agreement.
The draft text

11 Although generally maintaining a liberal environment for services, the
United States also maintains some restrictions in the transportation sector,
especially coastal shipping policies, as noted in its WTO and NAFTA
commitments. Also, Brazil recently pointed to some restrictions in
insurance, banking, and telecommunications that hampered its firms.

contains several broad topics that will be included in the agreement (such
as provisions on most- favored nation and national treatment), but the
specific disciplines and final language still must be negotiated. The draft
text also includes proposals on numerous other topics that at least one
country had recommended including in the final chapter. These additional
topics include safeguards, subsidy provisions, general or security
exceptions to the rules, and special rules for domestic regulations. In
addition to the rules for services trade, the services group also will need
to complete individual country schedules of market access commitments. In

these schedules, each country will describe what they pledge to do to
liberalize specific sectors and what reservations to the general rules they
propose to take for individual sectors or measures.

Significant Issues To produce a chapter with the rules for services trade
and the individual countries? schedules of commitments, negotiators face
several challenges.

One such challenge negotiators face involves the scope of the services
chapter. In the WTO services agreement, the coverage includes both a cross-
border supply of services and the supply of a service by a company

with a commercial presence in another country?s market. Companies can
establish a commercial presence by investing, but unlike the WTO, the FTAA
has a separate negotiating group on investment (discussed below). The United
States wants to deal with services- related investment primarily in the
investment chapter. However, the current draft text contains other proposals
that would include the commercial presence of a service provider under the
scope of the services chapter. Negotiators will need to reconcile other
scope- related issues, including (1)

the ways in which services provisions in the agreement apply to subnational
levels of government and (2) the timing for developing additional
disciplines for sectors, such as telecommunications or specialized
provisions for financial services. The WTO already has additional agreements
on basic telecommunications and financial services,

but not all FTAA countries are signatories or have fully adopted these
agreements. 12 The United States has recommended that there be

12 Twenty Latin American and Caribbean countries have made commitments under
the Basic Telecommunications agreement, with most agreeing to adopt at least
part of the reference paper on procompetitive regulatory principles,
according to an OAS study. About 15 Latin American and Caribbean countries
submitted newly improved schedules on financial services.

specialized provisions for financial services partly because of the
regulatory issues related to the sectors? importance to the overall economy.
Negotiators also must address the structure of the market access schedules
of commitments that each country will negotiate. There are two approaches to
scheduling services commitments: a top- down ?negative list? approach and a
bottom- up ?positive list? approach. In a negative list, all service sectors
are subject to the core rules, and countries must then

indicate which sectors or measures they would seek to exclude from coverage.
For example, a services agreement may have a ?national treatment? provision
that foreign service providers will be treated at least as well as domestic
service providers. If a country intends to subject foreign service providers
in the insurance industry to additional

regulations, then it would need to take an exception to the national
treatment rule. The positive list approach works the opposite way. A country
specifies in its schedule only the commitments it plans to make. If a sector
is not included in the schedule, then it is not covered by the agreement.
The WTO General Agreement on Trade in Services generally follows a positive
list approach, and NAFTA follows a negative list approach.

The United States advocates using the negative list approach in the FTAA
services chapter, arguing that it is ambitious but allows countries the
flexibility to deal with domestic sensitivities (by scheduling
reservations). Other FTAA countries, however, have proposed using a positive
list approach or some variant. Although most major subregional agreements in
the Western Hemisphere have used a negative list, Mercosur used a positive

list approach for its services liberalization. Business representatives
throughout the hemisphere that met at the April ministerial were split over
whether the FTAA should use a positive or negative list approach. Some U. S.
civil society and labor groups oppose using a negative list approach because
they believe it later may limit government social policies if exceptions for
particular sectors are not built into the agreement. They are

concerned that countries could use a comprehensive services agreement to
challenge government provision of social services, such as health and
education, if those services compete with private sector firms. USTR has
stated that it does not intend to use the FTAA to promote the privatization
of social services.

Negotiators will also have to agree on the timing of liberalization to be
achieved through the market access commitments. Countries will begin in May
2002 to negotiate the schedules of commitments to allow access into their
markets. Since this phase has not yet begun, countries generally have

not revealed their goals nor is it clear how difficult it will be to resolve
differences. However, U. S. service companies are considered some of the
most competitive in the world, and some FTAA countries may be

concerned about the final commitments they will make and the speed at which
liberalization will take place. Related to this, the draft text includes
potential language on a safeguard mechanism for services. 13 A safeguard
measure may provide negotiators some incentive to commit to greater
liberalization because they will have a mechanism to ease potentially

adverse effects. The negotiators? mandate calls for the progressive
liberalization of trade in services, but achieving this may be difficult for
two reasons. First, services involve domestic regulatory and qualitative
provisions that may in practice restrict foreigner?s access to markets.
Given these domestic regulations, free market access may be hard to define.
Second, countries may differ on whether to ?progressively

liberalize? services means to achieve full liberalization through one round
of negotiations or through a series of rounds in future years, which would
be scheduled in the agreement. Some subregional agreements, including
Mercosur, have used successive rounds of negotiations, while NAFTA countries
liberalized services through a single agreement. In addition, some members
of subregional agreements are attempting to preserve

preferences under those agreements from the scope of the FTAA
liberalization. Next Steps During the current 18- month phase of
negotiations, the services group will try to bridge differences in the draft
text of proposed rules. These will include refining the text in agreed- upon
areas of negotiation, such as mostfavored nation and national treatment
provisions, and deciding which

additional subjects the agreement should cover. Simultaneously, negotiators
will seek agreement on the modalities for negotiating specific country
schedules of commitments by April 1, 2002, for negotiations set to begin May
15, 2002. These decisions include whether to use a positive or negative list
approach, the structure of the schedules (i. e., the format), and

the process to use in negotiating country commitment offers. 13 The WTO
General Agreement on Trade in Services Agreement does not have a safeguard
measure but does discuss the possibility of future negotiations on a
safeguard measure.

Investment Topic, Importance, and

Although many outstanding details still need to be resolved, FTAA
Negotiating Mandate

negotiations on investment have yielded broad agreement on the thrust of the
chapter and the types of investment protection that the investment chapter
will address. However, the breadth of the forms of investment that will be
covered and whether the establishment or entry of investment will be covered
remains controversial. Consistent with the agreed mandate for

the negotiation, the United States proposes a comprehensive agreement that
covers both entry and operation of investment and direct and portfolio
investment. Portfolio investment, both stocks and bonds, is commercially
important for the United States, accounting for 60 percent of the $661
billion U. S. investment in FTAA countries in 1999. Figure 6 shows the
relative shares of U. S. FTAA investments in foreign direct investment
(FDI), stocks, and bonds. However, some other countries reportedly believe
this comprehensive approach is too broad. The investment chapter is also
where the outcome of internal U. S. debates could make it more or less
difficult to reach an overall FTAA agreement. The debates center on

two issues- the extent of the ability of investors to challenge government
actions as contravening FTAA investment disciplines and the inclusion of
labor and environmental provisions in the text of an FTAA.

Figure 6: Share of U. S. Foreign Direct Investment and Portfolio (Stock and
Bonds) Investments in FTAA Countries, 1999

Stocks

29% 40%

FDI

31%

Bonds Source: GAO analysis of U. S. Department of Commerce data.

As one of the largest foreign investors in Latin America, with investment
growing sharply in recent years, the United States has a keen interest in
FTAA negotiations on this issue. Some U. S. investment is subject to
conditions that hinder efficiency, and much of it is not protected by
international agreements. For example, the United States has bilateral
investment treaties in force with only 8 of the 33 other FTAA participants.
NAFTA protects U. S. investment in another two FTAA participants (Canada and
Mexico). But the United States does not have agreements with countries such
as Brazil, the largest Latin American nation. Although unilateral
liberalization of investment regimes has occurred, it could be reversed in
the absence of international agreements. In addition to better protection of
U. S. investors, an FTAA could further liberalize investment

regimes and improve U. S. options for serving growing local markets
throughout the hemisphere.

Other FTAA participants see FTAA investment rules as a way to send a
positive signal to foreign investors, which they seek to attract to foster
economic growth and stimulate competition and technology transfer. An

investment agreement could set basic ground rules for entry and treatment of
investment, increasing certainty, and lowering risk for potential investors.
Companies from Chile, Mexico, and elsewhere in Latin America are also
beginning to invest abroad. Indeed, the smaller nations in the region are
reportedly the key drivers for an ambitious investment accord within the
FTAA.

FTAA investment negotiations aim to go beyond the WTO?s coverage of the
issue, which is limited, 14 and to build upon subregional agreements such as
NAFTA, which contains extensive investment disciplines with respect to

the United States, Canada, and Mexico. Such an investment agreement could
commit the parties to open their market to investment from elsewhere in the
hemisphere, set minimum standards of treatment for investors, and establish
mechanisms for the resolution of disputes. The mandate of the negotiating
group on investment, as established by the San Josï¿½ Ministerial Declaration,
is to ?establish a fair and transparent legal framework to promote
investment through the creation of a stable and

predictable environment that protects the investor, his investment and
related flows, without creating obstacles to investments from outside the
hemisphere.? The group is to develop (1) a framework incorporating
comprehensive rights and obligations on investment and (2) a methodology to
consider potential reservations and exceptions to the obligations.

Progress to Date The negotiating group has produced a 43- page draft FTAA
chapter on investment that incorporates the proposals received to date from
FTAA participants. The draft chapter addresses a number of issues,
including:

 scope of application;  standards of treatment (national treatment, most-
favored nation

treatment, and a minimum or general standard of treatment);  performance
requirements;

14 The WTO?s primary investment disciplines are found in the Agreement on
Trade- Related Investment Measures, known by its acronym ?TRIMS,? and the
General Agreement on Trade in Services, which includes commercial presence
as a ?modes of supply? of services listed in national schedules of market
access commitments.

 key personnel; transfers;  expropriation and compensation; 
compensation for losses;  general exceptions and reservations;  dispute
settlement, which accounts for 16 of the draft?s 43 pages;  basic
definitions, including of investment and investor;  transparency of laws
and regulations; and  commitments not to relax labor and environmental laws
to attract investment.

The Tripartite Committee has also produced a compendium of investment
agreements, a comparison of investment regimes, and annual reports on
investment flows.

Significant Issues Discussions to date reportedly reveal broad agreement
among FTAA governments about many basic investment disciplines. In part,
this is due to the foundation laid in more than 60 bilateral investment
treaties by countries within the region and various subregional agreements.
These

agreements have established common approaches to defining investment and
investor, setting standards of treatment for investors, and settling
disputes. As a result, key participants report that the broad outlines of an
FTAA agreement on investment are visible. However, several topics appear
likely to be controversial or otherwise important in the negotiations and
many other details must be resolved. The investment chapter has also

fueled debate on two issues that are controversial domestically- the ability
of investors to challenge government actions as contravening FTAA investment
disciplines, and the inclusion of labor and environmental provisions in the
FTAA. The outcome of these debates ultimately could affect the willingness
of FTAA countries to conclude an overall agreement.

Investment is a lightning rod for opposition to the FTAA by U. S.
environmental, labor, and consumer nongovernmental organizations, which are
concerned that investment rules could undermine a government?s ability to
act in the public interest. The FTAA?s draft investment rules have already
drawn fire from such organizations, largely on the grounds that
multinational corporations may be given too much power relative to
governments and citizens. Their biggest concern is over the prospect that
private investors would be given direct access to investorstate

dispute settlement to challenge government noncompliance with the FTAA. 15
Governments can be required to pay the investor monetary damages if the
investor?s complaint is upheld by a final award. Such investor- state
provisions have been widely embraced under NAFTA and bilateral investment
treaties in effect throughout the world 16 and are favored by U. S. business
as an efficient and impartial means for enforcing their rights, in lieu of
local court systems, which might be very slow or otherwise deficient. 17
Although tribunals have no authority to recommend or require changes to
domestic legislation that violates the provisions, proceedings brought under
NAFTA have provoked concerns that such challenges could undermine a
government?s ability to protect health, safety,

and the environment; affect the balance between federal and state control;
and sideline U. S. courts in favor of international arbitration. 18 FTAA
investment negotiations are also the epicenter for another topic that has
been controversial domestically, the treatment of labor and the environment
in an FTAA. A U. S. proposal to include provisions on labor 15 Investor
protections that entitle investors to compensation for measures ?tantamount?
to expropriation and require signatories to accord a minimum standard of
treatment, apart from nondiscrimination, including ?fair and equitable
treatment,? have also proved controversial, under NAFTA for example.

16 For a description of NAFTA?s investor- state dispute settlement
mechanism, see North American Free Trade Agreement: U. S. Experience with
Environment, Labor, and Investment Dispute Settlement Cases (GAO- 01- 933,
July 20, 2001). 17 For a discussion of this business perspective, see
statement of Daniel M. Price, Member United States Council for International
Business, Testimony Before the Subcommittee on Trade of the House Committee
on Ways and Means, Hearing on Summit of the Americas and Prospects for Free
Trade in the Hemisphere, May 8, 2001, available at www. uscib. org. 18 For a
discussion of these concerns, see, for example, The Center for International
Environmental Law, Environmental Protection and Investment Rules in the Free
Trade Area of the Americas (Feb. 2001) and International Institute for
Sustainable Development, Private Rights, Public Problems, Winnipeg, Canada
(2001), available at www. ciel. org and

www. iisd. org, respectively.

and the environment in the FTAA investment chapter revealed deeply held and
divergent opinions among FTAA participants on the overarching question of
whether an FTAA should include labor and environmental provisions at all,
and, if so, how they would be enforced. The United States remains divided
domestically on this issue. Late in 2000, the United States

tabled language similar to NAFTA stating that countries agree not to relax
environmental or labor standards to attract investment. However, strong
opposition from most other FTAA nations on the grounds that labor and

environmental provisions were ?off the table? in FTAA negotiations resulted
in the initial exclusion of this proposal from the draft chapter. The
controversy prompted a call for guidance. At their April 2001 meeting in
Buenos Aires, FTAA ministers decided that ?any delegation has a right to

make proposals it deems relevant for the effective progress of the process,
which may eventually be placed in brackets? (signifying that the language
contained therein is not agreed on). Within the FTAA negotiating group on
investment, coverage is an important and difficult issue. One question is
whether the agreement will only cover treatment of investment once admitted
or include a general ?right of establishment? obliging governments to permit
investment to enter. Consistent with the goal of obtaining a comprehensive
agreement, the

United States proposed that nondiscriminatory treatment apply to the
?preestablishment? phase of investment, which would, except where parties
negotiate reservations for sensitive sectors, effectively accord the

signatories? investors the right to establish, acquire, or expand an
investment on an equal footing with domestic and other foreign investors. 19
Other FTAA participants also support covering the preestablishment phase.
However, even though many FTAA nations have unilaterally liberalized

foreign investors? entry, some are reluctant to guarantee a general right of
establishment to foreign investors in an FTAA. Another difficult issue is
whether and how to cover portfolio investment. A majority of countries,
including the United States, have proposed a broad, asset- based definition
of investment that includes portfolio investment, 20 some contracts and
concessions, and intellectual property. However, they

19 NAFTA, U. S., and Canadian bilateral investment treaties, and most free
trade agreements negotiated in the region take this approach of allowing
free entry, subject to specific reservations. 20 Portfolio investment
includes stocks, bonds, debt instruments, futures, options, and other
derivatives.

differ on the specific details of this definition. For example, some propose
to narrow the definition to exclude speculative and certain other
transactions and to allow governments to limit transfers if problems arise.
Given the Asian financial crisis and concern that short- term fluctuations
in capital flows contribute to currency fluctuations and balance of payments
crises, certain nations oppose covering portfolio investment in the

definition at all. Other countries propose addressing this concern by
providing an exception to the transfers protections for these situations,
rather than foreclosing portfolio investment from all protections of the
agreement.

Approaches to performance requirements also differ. Performance
requirements- such as local content, trade balancing, local hiring or
management, and technology transfer requirements- are sometimes conditions
for obtaining incentives or benefits from the host government and can also
be conditions for establishing an investment. The United

States proposes to go beyond the WTO Trade- Related Investment Measures or
"TRIMS" agreement and current bilateral investment treaties 21 in
prohibiting (subject to certain exceptions) 22 several such performance
requirements and is proposing disciplines similar to NAFTA. NAFTA and the U.
S. FTAA proposal discipline certain performance requirements whether they
are tied to an advantage or imposed as a condition for establishment. Other
performance requirements, such as technology transfer, are only disciplined
when they are a condition for establishment. Other FTAA participants also
want to go beyond the WTO, but still others want to be able to employ such
tools, which they see as important to promoting development.

Next Steps The negotiating group on investment has been charged to come up
with a second draft of its chapter by August 2002. In addition, it is also
to present

recommendations on negotiating modalities and procedures to the TNC by April
1, 2002. The TNC is to evaluate the negotiating group?s

21 The TRIMS agreement explicitly disciplines a limited number of
performance requirements, whether they are imposed as a condition for
establishment or are a condition for the receipt of an advantage. U. S.
bilateral investment treaties do not discipline performance requirements
when they are a condition for receipt of an advantage.

22 However, it has proposed exceptions, such as for measures necessary to
protect human, animal, or plant life and to remedy competition problems; for
government procurement; and for aid and export promotion programs.

recommendations on modalities at its first meeting after April 1, 2002, to
initiate investment coverage negotiations no later than May 15, 2002.

There are two basic modality issues. One is the approach that will be taken
to negotiating coverage. The United States is expected to propose a
?topdown? or negative list approach to coverage, which starts from the
premise that all sectors are covered unless specifically reserved or
excepted. The

alternative is a ?bottom- up? or positive list approach, which starts from
the assumption that nothing is covered and builds up from there by
identifying covered sectors. Both methods could result in similar levels of
market access commitments initially because a member would be expected to
include a reservation in a negative list approach for any sector in which it
declines to take commitments under a positive list approach. However, the

choice of approach might have implications for future investment access.
Under a negative list approach, new investment measures would have to
conform (unless they fell within one of the general exceptions enumerated in
the FTAA). Under a positive list approach, new discriminatory measures would
be allowed in sectors or areas not included in members? schedules. The
second issue is the form that reservations will take. NAFTA bases
reservations and exceptions primarily on existing law, permitting

exceptions for sectors on a limited basis. In contrast, U. S. bilateral
investment treaties except broad sectors. Again, the degree of specificity
could have implications for future access. The negotiating group on
investment will need to coordinate with the FTAA negotiating group on
services as it performs these tasks. The United States has proposed that the
FTAA investment chapter apply to all investment, whether it relates to a
good or a service. Because some services are

provided through investment and others are provided through cross- border
trade, how the issue of taking reservations is handled in both the
investment and services chapter will be important to determining the ground
rules for service providers in the hemisphere.

Government Procurement

Topic, Importance, and Government procurement in the FTAA negotiations
offers potentially great Negotiating Mandate

market- opening opportunities for the participants. The OAS estimates that
the market for government procurement in the Western Hemisphere is valued at
approximately $250 billion. U. S. observers are encouraged by potential
market- opening possibilities in this area because most FTAA countries are
not bound by international rules on government procurement. In addition,
outside of North America, many FTAA countries

have limited experience with international government procurement regimes.
This is because, unlike other negotiating groups, the FTAA government
procurement negotiations do not proceed from a commonly applied WTO
agreement. 23 At the FTAA San Josï¿½ Ministerial, the trade ministers formed
the negotiating group on government procurement with the mandate to expand

access to the government procurement markets of FTAA countries. More
specifically, ministers directed the group to (1) achieve a framework to
ensure transparency of government procurement processes, without necessarily
implying an identical system for each country; (2) ensure

nondiscrimination in government procurement; and (3) ensure impartial and
fair review for resolving procurement complaints and appeals by suppliers.

The FTAA government procurement regime may be similar to other multilateral
agreements, such as the WTO Government Procurement Agreement or NAFTA, which
cover the terms of contracts for a wide range of goods and services. Under
these agreements, the entities or enterprises to be covered are specified,
as are minimum purchase values, called 23 Government procurement is
addressed in the WTO by the Government Procurement Agreement, a
?plurilateral agreement,? which means that accession to the agreement is
voluntary. Only the United States and Canada of all FTAA countries are
currently party to the Government Procurement Agreement. They, along with
Mexico, are also subject to government procurement disciplines under NAFTA.
Mexico also has NAFTA- like commitments with Costa Rica. An agreement
between Chile, Costa Rica, El Salvador, Guatemala, and Honduras contains
principles- based procurement commitments. Other

Western Hemisphere subregional agreements, such as Mercosur and the Andean
Pact, do not currently have binding market access provisions on government
procurement.

thresholds. Generally, the higher the number of entities and enterprises
covered by an agreement and the lower the threshold, the more liberalizing
the agreement.

Progress to Date Although FTAA government procurement negotiations will
begin to address market access concessions in the upcoming phase of the

negotiations, the bulk of the 34- page draft text submitted by the
negotiating group to the ministers in Buenos Aires focuses on ways to
conduct the procurement proceedings. The text includes proposed language on
a wide range of rules and technical matters, including  the application of
principles such as national treatment and mostfavored

nation treatment;  special and differential treatment for smaller
economies;  the thresholds and valuation of contracts;  procurement
exceptions;  publication of laws and rules governing procurement processes;
 specific procurement procedures, including the qualification of

suppliers;  the process for selecting and awarding contracts; and  review
and appeal procedures, including dispute settlement.

Significant Issues One aspect of the negotiation- transparency 24 is
significant for government procurement and is addressed in the draft text.
According to IDB, government procurement has been considered a nontariff
barrier due to the tendency to award contracts to national firms rather than
to make decisions that are based only on price and quality. This tendency
has resulted in an inefficient and sometimes corrupt process. Government
procurement experts believe that an agreement that is transparent in its

explication of procedures and its means to verify the application of rules
provides a variety of benefits. For example, a transparent agreement renders
fraud and corruption more difficult. It would also enhance the opportunity
for competition in bidding, resulting in higher quality procurements and
budgetary savings to governments. The United States is seeking an FTAA that
would require publication and wide dissemination of 24 Transparency in this
context refers to both the clarity of government procurement rules and
procedures and the means by which procurements are made known to the public.

all laws, regulations, judicial decisions, and other measures governing
government procurement. Negotiators will have to resolve differences in two
basic approaches to the government procurement chapter. One approach, backed
by the United States, is rules- based, which would rely on detailed
procedural provisions while avoiding unnecessarily burdensome requirements.
The United States

and other parties to the Government Procurement Agreement and NAFTA have
considered that this approach is necessary because of the nature of
government procurement, which can be influenced by government policy and
politics, in addition to commercial considerations. As a result, the United
States believes that, to enjoy the concessions that will be negotiated, the
agreement must include specific procedural provisions on topics such as the
publication of timetables and tendering procedures as found in both NAFTA
and the Government Procurement Agreement. However, other countries prefer a
principles- based approach to the FTAA

government procurement chapter, which would rely on more general guidelines.
Proponents of this approach argue that it is better to make a basic
commitment to nondiscrimination but not prescribe specific

procedures that all of the parties are to follow. It would thus be up to the
local authorities to develop their own procedures. An advocate of this
approach noted that no degree of specificity would prevent a country

determined to avoid compliance from doing so, and that ultimately good faith
in applying the principles has to be relied on. If discrimination was found,
a challenge could still be brought under the dispute settlement provisions.

Next Steps To move forward with government procurement negotiations,
ministers at Buenos Aires instructed the government procurement group to 
submit recommendations to the TNC by April 1, 2002, on the guidelines,

procedures, and deadlines for negotiations so that the negotiation of
concessions can begin no later than May 15, 2002, and  submit a new version
of the draft text of the government procurement chapter to the TNC by August
2002.

The ministers also provided a directive to the government procurement
negotiators to identify, by April 1, 2002, the scope and details of the
statistical information that the countries should exchange with each other
and use to support their negotiations. This directive was issued because
some delegations felt it would be necessary in order to prepare for an

exchange of statistical data on their government procurement markets before
commencing the market access negotiations. On the basis of the ministerial
directive, the negotiators must decide on the statistical systems and entity
lists they need to undertake the negotiations. For example, there is no
point in requiring statistical information on procurement by every
government agency in the hemisphere before the FTAA governments have a
clearer understanding of the likely scope of the market access negotiations,
according to USTR.

Chapt er 3

? Other Rules and Institutional Provisions FTAA negotiators are also
developing trade rules and institutional provisions for four other topics:
IPR; subsidies, antidumping, and countervailing duties; dispute settlement;
and competition policy. Negotiating groups have prepared draft chapters on
their respective topics. Some issues under consideration in these groups are
controversial. For example, FTAA participants have fundamental disagreements
regarding IPR. The United States would like the FTAA to represent a state-
of- the- art agreement that goes beyond the obligations of other relevant
agreements. Some developing countries, on the other hand, are reluctant to
go beyond

their current obligations. FTAA countries? interests also diverge in the
area of antidumping measures. A U. S. proposal to reserve its right to apply
its trade remedies angered many other FTAA participants who want to curb the
use of these measures. Other issues under consideration in these groups will
require intense effort to finalize outstanding details. For example, FTAA
participants must resolve dispute settlement issues such as compliance,
appeals, and the participation of outside parties. Similarly, FTAA
negotiators must determine the level of detail that the competition

policy agreement needs to have to effectively proscribe anticompetitive
business conduct. Table 2 provides an overview of the topics covered in this
chapter. The remainder of this chapter describes each of these topics,

its importance, and the group?s negotiating mandate; progress to date;
significant issues; and next steps. Information on the potential economic
effect of trade liberalization for these topics can be found in chapter 5.

Table 2: Overview of Negotiating Groups on Other Rules and Institutional
Provisions Significance for the United Topic States Mandate Next steps

Intellectual property Important to U. S. high- tech and Promote and ensure
adequate and August 2002 - Submit revised text. rights (IPR) knowledge-
based industries. effective protection of IPR. Subsidies, Politically
sensitive debate over Enhance WTO compliance and April 2002 - Submit
recommendations antidumping, and trade remedy laws. improve application of
trade

on subsidies, antidumping, and countervailing duties remedy laws.
countervailing duties.

August 2002 - Submit revised text. Dispute settlement Linchpin of effective
operation of

Establish a fair, transparent, and August 2002 - Submit revised text.
overall agreement. effective dispute settlement mechanism.

Competition policy New area for 22 of the 34 Ensure that anticompetitive
August 2002 - Submit revised text. participants. practices do not undermine
FTAA benefits.

Source: GAO analysis.

Intellectual Property Rights

Topic, Importance, and According to the WTO secretariat, IPR is defined as
the rights given to Negotiating Mandate

persons over the creations of their minds, such as a book or software
program, usually providing the creator with an exclusive right over the use
of his or her creation for a period of time. The goal is to reward
creativity

and to establish an environment conducive to the broad sharing of ideas. IPR
is one of the most important issues to the United States because it enjoys a
decisive competitive advantage in terms of high- tech, knowledgebased

industries and advancing the interests of these industries in the FTAA
through strengthening IPR could result in significant gains for the U. S.
economy. U. S. software firms, for example, would benefit if FTAA nations
agreed that their governments would use only legitimate software in their
agency operations. On the other hand, developing countries want to include
in IPR disciplines such as folklore, and traditional knowledge.

Therefore, IPR negotiations clearly marks the vast differences in economic
and technological interests of developed and developing countries.

IPR negotiations in the FTAA promise to be challenging because FTAA nations
have fundamentally divergent interests and have not, for a variety of
reasons, made much progress on IPR negotiations. As a result, considerable
work remains. Some of the topics under consideration are controversial or
completely new to trade negotiations. The FTAA could go beyond the WTO and
NAFTA by addressing technologies, treaties, and

issues that have emerged since these landmark trade agreements were
concluded in 1994 and 1993, respectively. For example, since then,
industries such as biotechnology and e- commerce have emerged as
commercially significant industries, a number of new IPR treaties have been
concluded, and others are under negotiation. 1

The specific mandate for the FTAA IPR negotiations as stated in the San Josï¿½
Ministerial is to reduce distortions in trade in the hemisphere and promote
and ensure adequate and effective protection to IPR. The mandate notes in
doing so, changes in technology must be considered.

Progress to Date The IPR negotiating group has developed a 106- page draft
chapter that compiles proposals from different FTAA nations involved on 15
topics: (1) trademarks, (2) geographical indications, (3) copyrights and
related rights, (4) folklore, (5) layout designs of integrated circuits, (6)
patents, (7) the relationship between the protection of traditional
knowledge and access to genetic resources and intellectual property, (8)
utility models, (9) industrial designs, (10) plant varieties, (11)
undisclosed information, (12) unfair

competition, (13) anticompetitive practices in contractual licenses, (14)
enforcement of IPR, and (15) technical cooperation. Significant Issues A
variety of factors have hindered progress in FTAA negotiations on IPR.

First, some FTAA nations slowed progress in the previous phase of
negotiations. In part, this was due to a fundamental reticence by some FTAA
nations to go beyond their current obligations under the WTO Agreement on
Trade- Related Aspects of Intellectual Property (TRIPS). Also, because of
its importance to the overall FTAA package, which will be

1 The agreements concluded in or after 1994 include a trademark treaty, two
copyright treaties dealing with challenges of digital technology, a
convention on artistic and literary works, a new agreement on industrial
designs, and a new patent treaty. Cesar Parga, ?Intellectual Property
Rights,? in Toward Free Trade in the Americas, Josï¿½ Manuel SalazarXirinachs
and Maryse Robert, Eds. (Washington, D. C.: Brookings Institution, 2001), p.
209.

a ?single undertaking,? some nations reportedly tried to ensure that
negotiations on IPR did not get ahead of negotiations on topics of more
interest to them, such as agriculture or subsidies, antidumping, and
countervailing duties, according to U. S. officials. Second, the subject of
IPR is complex. Each area involves a different agency, specialty, or
industry, which makes the negotiating environment challenging. Third, the
interests of FTAA participants in IPR differ widely. The United States, the
leading proponent in FTAA IPR negotiations, is pushing for a state- of-
theart

IPR agreement that reflects changes in technology, improved international
rules, and better enforcement. The U. S. proposal for the FTAA chapter on
intellectual property goes beyond the obligations that the United States and
most FTAA countries have undertaken through the TRIPS agreement. It would
extend NAFTA disciplines to countries elsewhere in the region. The United
States is particularly interested in strengthened enforcement of IPR because
many FTAA countries have been

lax in enforcing TRIPS provisions. (See ch. 5 for estimates of the economic
impact of lax IPR enforcement.) Copyright piracy, for example, is still
commonplace. The United States also wants to ensure that the FTAA does not
undermine IPR protections secured under the WTO and NAFTA.

Developing countries in the region have not traditionally been strong
supporters of IPR. However, in the past decade, along with other economic
reforms and the advent of TRIPS, they have experienced a progressive

evolution in views and policies in favor of greater IPR protection. Laws and
institutions now exist in key nations such as Mexico, Brazil, and Argentina,
according to trade experts. However, some FTAA countries are reluctant to
take on obligations beyond TRIPS, particularly since many

improvements in IPR resulting from the FTAA will have to apply
unconditionally to all other WTO nations under the ?most favored nation?
principle contained in Article 4 of the TRIPS agreement. In addition, some
FTAA countries have identified areas such as traditional knowledge and
folklore that can benefit them within an IPR regime. However, these
countries face resource and technical challenges to effectively enforcing
IPR and believe that there may be trade- offs between stronger IPR

enforcement and other domestic objectives.

Because IPR negotiations are at a relatively early stage, it is difficult to
tell which issues will prove controversial, a U. S. official said.
Potentially difficult subjects for negotiation include- copyrights in a
digital era, compulsory licensing, limitations to patentabilty, enforcement,
and the

relationship of trademarks to geographical indications. 2 Proposals by other
FTAA nations on folklore, genetic resources, and traditional knowledge also
may pose difficulties for the negotiators. In the area of copyrights, the
United States is proposing to ensure protection of copyrighted works in a
digital environment by having the FTAA incorporate the substantive
provisions of two treaties concluded in 1996 under the auspices of the World
Intellectual Property Organization (WIPO). These treaties deal with music,
programs, and literary works provided over the Internet. Although a number
of countries in the hemisphere already have acceded to the WIPO treaties,
others have yet to do so. The WIPO provisions provide important new rights,
such as an

exclusive right for authors to make their works available on- line. However,
the United States faces resistance to its proposal. Some nations do not want
to go beyond their current TRIPS obligations. Others object to the U. S.
proposal because it contains language intended to clarify certain principles
contained in WIPO treaties. For example, the WIPO treaty

prohibits tampering with technology designed to prevent unauthorized access
to protected works, performances, and phonograms. The U. S. FTAA proposal
clarifies that this prohibition must cover both the building of devices
capable of tampering with the protected subject matter (e. g.,

decoding devices) and the actions of actually doing so (e. g., hacking),
with appropriate exceptions permitted. There are also many contentious
issues in the area of patents. For example, compulsory licensing, or
government permission to produce a patented product or process without
authorization of the patent holder, is a contentious issue in the IPR debate
over the proper balance between providing incentives for research and the
need for public access. This is especially acute with regard to making
medicines affordable and

accessible. In FTAA negotiations, the United States proposes to clearly
specify the circumstances under which FTAA members can grant compulsory
licenses. Another FTAA participant has proposed that FTAA

2 U. S. proposals to extend the term of copyright protection, require
protection of data submitted for regulatory approvals, and only allow
competitors to manufacture or use patented products for regulatory approval
also face resistance.

members should be given greater scope to grant compulsory licenses,
including if a patent holder does not ?work? the patented product within a
specified period of time. The positions of other FTAA participants range
from keeping the status quo under TRIPS- which does not specify the
circumstances when governments can grant compulsory licenses, but sets
procedural requirements when doing so- to easing TRIPS? procedural

requirements. The issue of whether certain items can or should be excluded
from patentability is another on which FTAA members diverge significantly,
with three major options proposed. First, reflecting U. S. leadership in
medical and agricultural biotechnology, the United States is trying to
narrow (from TRIPS) the categories of products or processes for which
patents may be refused. 3 The United States is proposing that the FTAA
result in a

requirement for members to grant patents for all subject matter except
medical and diagnostic procedures, provided that the basic criteria for
granting a patent are met- namely, that they are new, involve an inventive
step, and are capable of industrial application. FTAA countries would retain
the right under TRIPS to refuse patents for products or processes whose
commercial use in FTAA countries would jeopardize public order or

morality, or seriously jeopardize human, animal, or plant health or the
environment. The second option, proposed by other FTAA countries, is that
FTAA members retain the right to exclude plants and animals (other than
microorganisms) and biological processes from patentability, even if they
otherwise met the criteria for patentability. The third option proposed

is that FTAA members be prohibited from granting patents for plants,
animals, and biological processes.

Enforcement is also an important issue in the FTAA negotiations. The United
States has serious concerns about the enforcement of IPR in the FTAA region
and has proposed various steps to bolster enforcement through the FTAA. For
example, the United States has proposed that violators may be required to
pay damages for IPR violations commensurate

with the harm suffered, including compensation that is based on the full
retail value. Other FTAA participants, particularly developing countries,
have resisted the United States on the issue of enforcement. Many of these

3 TRIPS, Article 27. 3 currently allows governments to exclude from
patentability (1) diagnostic, therapeutic, and surgical methods; (2) plants
and animals other than microorganisms; and (3) essentially biological
processes for the production of plants and animals, other than nonbiological
and microbiological processes.

FTAA participants are already facing difficulty implementing their TRIPS
obligations and say that they lack the resources and capacity to enforce IPR
and face other problems that are more pressing, such as violent crime

and drug trafficking. In the area of trademarks, the main concern involves
the relationship between trademarks and geographical indications. Both
trademarks and geographical indications provide consumers with information
about the source of products; both marks are considered distinct IPR rights
that entitle the owner to exclusive use of the mark once it is registered.

Geographical indications, such as Idaho potatoes, Florida oranges, and
Washington State apples, are marks that identify a good as originating from
a geographic area where the quality, reputation, or other characteristic of
the good is essentially attributable to that area. FTAA negotiators must
decide whether the registration of one type of mark should preclude the

later registration of the other type of mark. The United States wants the
FTAA to establish the principle that the owner of the mark that was
registered first- regardless of whether the original (first) mark is a
trademark or a geographical indication- has the right to preclude
registration of another mark sought at a later date. This would prevent
problems such as the one that occurred in Europe when a geographical
indication was granted for Budweiser beer (made in a town by the name Budvar
Ceske in the Czech Republic), despite the fact that a trademark on

the same name was already registered earlier to the U. S. company Anheuser-
Busch. Other FTAA participants from developing countries strongly resist the
U. S. proposal because they perceive it as going beyond their current TRIPS
obligations.

To capture greater returns from IPR, some developing FTAA countries are
proposing to go beyond TRIPS and include topics such as traditional
knowledge, folklore, and genetic resources in the FTAA?s IPR chapter.
Traditional knowledge involves knowledge and practices such as traditional
healing methods. Some claim that this knowledge, which exists in local
communities and is often passed from generation to generation, can be
valuable in the pursuit of innovative medicines. Other countries prefer that
a technical forum, such as the WIPO, continue to vet those issues before
they are addressed in the FTAA. They are also skeptical that

these concepts should be considered new forms of intellectual property. Next
Steps The IPR negotiating group is now working to remove or consolidate
duplicative language from the bracketed text. This process is expected to

be completed over the summer of 2001, and substantive negotiations are
expected to begin October 2001. The group will work to eliminate differences
in the updated draft text by August 2002.

Subsidies, Antidumping, and Countervailing Duties

Topic, Importance, and A politically sensitive issue for FTAA negotiators
involves the trade Negotiating Mandate

remedies used to counter ?unfairly traded? imports. These measures are (1)
antidumping duties, which are imposed on ?dumped? imports (i. e., imports
sold at a price lower than normal value) and (2) countervailing duties,
which are imposed on subsidized imports. 4 An importing country imposes
antidumping or countervailing duties to remedy the injury to the

domestic industry caused by the dumped or subsidized imports. Of these trade
remedy measures, 5 antidumping has been very controversial. Proponents
believe an antidumping regime is necessary to offset unfair

trade practices, while opponents view it as a protectionist system that
shelters noncompetitive firms or industries while penalizing domestic
consumers.

4 A subsidy is generally considered to be a financial contribution provided
by a government that provides benefit to a specific company, industry, or
group of industries for the production, manufacture, or distribution of
goods or services. Government subsidies include direct cash grants,
preferential loans, loan guarantees, and tax credits.

5 Trade remedies also include safeguard actions, which are discussed in the
section of this report on market access.

The United States is one of the most frequent users of antidumping measures,
which are allowed under rules established in the WTO, and is strongly in
favor of having the use of these measures be governed by WTO

rules rather than FTAA- specific rules. Many other FTAA countries also
employ antidumping measures as a way to address unfairly traded imports. The
OAS reports that most regional trade agreements involving countries in the
Western Hemisphere allow their members to use antidumping

measures as long as they comply with WTO rules. Five FTAA countries
predominantly account for the use of antidumping measures in the region. 6
However, the OAS also reports that 19 FTAA countries had never used
antidumping measures as of 2000. In addition, the Canada- Chile free trade
agreement would eliminate the use of antidumping between the two countries.
A Chilean trade negotiator explained that Chile believes the use of
safeguard measures is preferable to antidumping because safeguard measures
are a more specific instrument and are temporary. (See ch. 5 for more
information on the hemispheric use of antidumping.)

Ministers at the San Josï¿½ Ministerial created the negotiating group on
subsidies, antidumping, and countervailing duties with a mandate to (1)
examine ways to deepen disciplines, if appropriate, and enhance compliance
with the terms of the WTO Agreement on Subsidies and

Countervailing Measures and (2) achieve a common understanding with a view
to improving, where possible, the rules and procedures regarding trade
remedy laws to avoid creating unjustified barriers to trade in the
hemisphere.

Progress to Date In advance of the ministerial meeting in Buenos Aires, the
subsidies, antidumping, and countervailing duties group prepared a fully
bracketed, 17- page draft text covering a range of issues. The text includes
detailed technical provisions on such topics as

 the determination of dumping and injury,  investigations and evidence, 
the application of provisional measures,  assessing and collecting duties,
 special provisions for developing countries, and  dispute settlement
proceedings.

6 These countries, listed in the order of the number of antidumping measures
taken, are the United States, Canada, Mexico, Argentina, and Brazil.

The draft proposals submitted by the various FTAA negotiators vary widely in
their implications for a hemispheric antidumping regime- from maintaining
the status quo to eliminating antidumping measures altogether within the
region. The United States strongly advocates an approach that would maintain
the current WTO rules on antidumping and countervailing duties in the FTAA.
Many other proposals in the draft text are modifications to the WTO rules on
antidumping measures that, according to the U. S. negotiator, would make it
more difficult to use such measures within the FTAA. For example, a WTO
threshold for sales below cost (a

measure used to determine the cost of a dumped product) would be doubled, 7
and another proposal would have the effect of raising the standard for the
determination of injury. 8 The United States strongly opposes these
modifications, arguing that they would weaken the U. S. antidumping law.
Further, modifications would present serious legal and practical problems by
effectively creating dual trade remedy regimes that would greatly complicate
dumping investigations, which often include

suppliers from multiple countries. Another proposal introduces a procedure
not now included in the WTO agreement, which would provide for a public
interest inquiry that could result in the imposition of reduced dumping or
countervailing duties. 9 Yet another very different proposal contained in
the draft text calls for the outright renunciation of antidumping measures
on imports from within the region once the free trade area is established.
10 Significant Issues FTAA subsidies, antidumping, and countervailing duties
negotiators have

addressed three topics of note so far: the proposed antidumping draft text,
the possibility of deepening disciplines on nonagricultural subsidies, and
the relationship between trade and competition policy. The most difficult of
the three issues involved the draft text. The United States? publicly stated
position is that its ability to maintain effective remedies against 7
Article 2.2.1 of the draft text contains a footnote proposal that would
increase the threshold

for the percentage of sales below cost that must be considered in
determining normal value from 20 to 40 percent.

8 Article 3. 4 of the draft text includes a proposal that would require a
domestic industry to suffer a loss for the period of time in question, which
is not required by the WTO agreement. 9 Article 18 of the draft text
contains proposals incorporating consumers? rights and public interest
concepts in antidumping investigations.

10 Article 19 of the draft text reflects this proposal.

dumped or subsidized imports is essential to achieving support for the
overall goal of trade liberalization. To this end, the United States
proposed draft text stating that each party reserves the right to apply its
antidumping and countervailing duty laws, and that no provision of the
agreement shall be construed as imposing obligations with respect to these
laws. According to U. S. negotiators, the United States proposed that this
draft text be included as a stand- alone proposal, separate from the other
draft text, because it represents an entirely different approach to the
draft chapter. They further explained that this language was intended to
maintain the status quo under WTO trade remedy rules, which the other

proposals would have the effect of modifying. The U. S. proposal created a
controversy among FTAA participants. According to one of the foreign lead
negotiators, many other participants were angered by the U. S. proposal
because they believed the United States wanted to take antidumping off the
negotiating table. U. S. negotiators stated that their proposal represented
a different approach under which,

although substantive WTO rules would remain unchanged, some improvements in
the areas of transparency and due process could be explored. The controversy
was defused by several ministerial directives, as discussed below. Because
the issue of antidumping is so politically sensitive, other such flare- ups
may recur throughout the course of the

FTAA negotiations. Deepening the WTO disciplines on domestic subsidies on
nonagricultural goods is a much less controversial aspect of the process to
date. 11 The United States has advocated exploring options for deepening
WTO- level subsidy disciplines and improving transparency, consistent with
the mandate of the negotiating group. This issue should receive more
attention during the next phase of the negotiations than it has so far.

A final issue that has been addressed by this negotiating group is the
relationship between trade and competition policy. At the outset of the FTAA
discussions, for example, some countries wanted to examine the possibility
of injecting antitrust concepts into antidumping rules to more narrowly
circumscribe the antidumping remedies. Both the antidumping

and competition policy negotiating groups undertook studies to examine the
relationship, which were then reviewed by the groups. The United States
believes that competition rules and trade remedies address distinctly 11
Agricultural subsidies are addressed in the FTAA agriculture negotiations.

different problems. At their April 2001 meeting, the FTAA ministers directed
the two negotiating groups to use the studies for further discussion, rather
than to solicit additional studies.

Next Steps To move the negotiations forward, ministers directed the
subsidies, antidumping, and countervailing duties group to undertake several
actions during the next negotiating phase. Specifically, the ministers
instructed the group to  intensify its efforts to reach a common
understanding with a view to improving, where possible, the operation and
enforcement of hemispheric trade remedy laws, and submit recommendations on
the

methodology to be used to achieve this objective to the TNC by April 1,
2002;  intensify its work of identifying options for deepening, where
appropriate, existing disciplines on subsidies in the WTO Agreement on

Subsidies and Countervailing Measures, and submit recommendations on the
methodology to be used to achieve this objective to the TNC by April 1,
2002;  identify, using a previously prepared study on trade and
competition,

any interaction between trade remedies and competition policy that may merit
further consideration by the TNC, and provide the results to the TNC by
April 1, 2002; and  submit a new version of the draft text by August 2002.
As part of the compromise reached to move the process forward, the ministers
at Buenos Aires required the subsidies, antidumping, and countervailing
duties group to prepare recommendations on its methodology to meet the
ministerial mandates concerning trade remedy laws and subsidy disciplines.
Some FTAA experts believe that this requirement was put in place to ensure
that all negotiating groups move

forward in tandem and that progress on subsidies and antidumping is
commensurate with the rest of the negotiations. The U. S. negotiator
believes that the methodology directive is not as significant for this group
as reaching agreement on the draft text, which will be more challenging.

Dispute Settlement Topic, Importance, and

Although the issues involved are arcane, the topic of dispute settlement in
Negotiating Mandate

the FTAA process is recognized as a linchpin for the effective operation of
the FTAA agreement as a whole. FTAA participants, including the United
States, appear to agree on the nature of the dispute settlement mechanism to
be created, but three specific issues are likely to be controversial: how to
handle compliance, whether to allow appeals, and the extent of public access
to the process. Finalizing an FTAA dispute settlement chapter also will
require resolving other issues, such as the FTAA?s jurisdiction versus

other international agreements, third- party rights, and institutional
issues. The FTAA?s dispute settlement mechanism will serve a critical role
in a final FTAA agreement for three reasons. First, it will ensure that the
rights secured and commitments made in an FTAA are upheld. Because the FTAA

is expected to go beyond the WTO and other international agreements, FTAA
dispute settlement is viewed as the only meaningful way to enforce those
commitments. Second, a well- functioning FTAA dispute settlement system will
deter countries from adopting measures that do not comply

with the FTAA. Third, it will bolster members? confidence by preserving the
balance of benefits attained in negotiations and ensuring they have recourse
to effective and impartial redress.

The FTAA dispute settlement chapter is expected to create a way to resolve
government- to- government disputes over the application and implementation
of the FTAA agreement. Specifically, the negotiating group?s mandate is to

 establish a fair, transparent, and effective mechanism to settle disputes
among FTAA countries and  design ways to promote the use of arbitration and
alternative dispute

settlement mechanisms to solve private trade controversies in the framework
of the FTAA.

Progress to Date The primary achievement of the negotiating group has been
to develop a draft 30- page chapter on dispute settlement that consolidates
proposed

legal text from all FTAA participants. Negotiations on the chapter are at an
early stage, and positions continue to evolve as domestic consultations

continue. Participants report considerable work will be required to bridge
substantive differences and resolve technical and practical issues. The
draft chapter on dispute settlement covers

 definitions, scope of application, principles, general provisions, and
choice of forum;  procedures for dispute settlement, including
consultations and resort to

a neutral body or panel;  the nature of a final FTAA dispute settlement
decision and

consequences of failure to implement a decision;  the obligation to use
FTAA dispute settlement to redress violation or

impairment of benefits of the FTAA agreement;  the extent to which the
dispute settlement procedure will be

confidential or transparent in nature;  differences in levels of
development and effective access; and  alternative dispute resolution, such
as private commercial arbitration.

Significant Issues Discussions on dispute settlement in FTAA are at an early
stage, but participants report that there is agreement on many of the
fundamentals. For example, there appears to be wide agreement about the
nature of the FTAA dispute settlement process- namely, that it have both
diplomatic and quasi- judicial features to secure a positive and mutually
acceptable resolution to the dispute at hand. A dispute settlement process
would likely have three stages: (1) mandatory consultations between the
complaining country (or countries) and the country whose measure is at
issue; (2) if such consultations fail, establishment of a neutral panel to
rule on whether the complaint of noncompliance is warranted; (3) the

expectation that a country found to be in violation of its FTAA obligations
would respond by complying or by offering compensation. Failing either
response, it could face retaliation in the form of new restrictions on its

trade. That said, important differences in the negotiating process remain
and many complex issues must be worked out.

A major substantive difference in the FTAA negotiations concerns compliance.
The two models of dispute settlement under active consideration are the WTO
and NAFTA. 12 A key difference between the two models are the steps taken at
the compliance stage. Under the WTO, before a complaining party that has won
a favorable ruling can retaliate, it must wait for the outcome of a possible
appeal; the passage of a

?reasonable period of time? for the party found to be in breach to comply;
and, if it still fails to compy, the possibility of up to three additional
authorization or arbitration procedures. Under NAFTA, the aggrieved

country can automatically retaliate 30 days after the panel ruling. 13 The
United States has aggressively, and often successfully, employed dispute
settlement in complaints against foreign nations? measures in the WTO. 14
However, the WTO process has been accused of taking too long and failing

to reliably produce compliance. 15 Resolving the different approaches to
compliance will require FTAA participants to balance a desire for certain
enforceability against practical and defensive considerations. Recent events
highlight that the United States may be forced to defend its own measures
and could have difficulty meeting short deadlines or complying with adverse
rulings. For example, the United States is now struggling to comply with
rulings in two recent

cases involving a multibillion dollar U. S. tax program known as the Foreign
Sales Corporation and U. S. restrictions on Mexican trucking services.

12 A third model is for a supranational court, similar to the Andean Court
of Justice, but this model is seen as less viable given the expected nature
of an eventual FTAA. 13 The party subjected to retaliation may request a
panel to determine whether the level of suspension is ?manifestly
excessive,? but retaliation may continue while the panel deliberates. 14 For
a discussion of the U. S. experience, see World Trade Organization: U. S.
Experience to Date in Dispute Settlement System (GAO/ NSIAD/ OGC- 00- 196BR,
June 14, 2000).

15 Our evaluation of the U. S. experience with WTO dispute settlement found
that 80 percent of the cases filed by the United States that went to WTO
panel or appellate adjudication took longer than the agreed on timetables
and that in one out of four WTO rulings, compliance was not deemed
satisfactory and had been challenged. See World Trade Organization: Issues
in Dispute Settlement (GAO/ NSIAD- 00- 210, Aug. 9, 2000), pp. 21 and 25.

Another major difference in the FTAA negotiations is evident on the subject
of appeals. Some FTAA nations have proposed a standing appeals body that
would, upon request of either party, examine the legal bases for panel
rulings and accept, reject, or modify them. Other nations did not propose

an appeals stage. Although the U. S. proposal did not include an appeals
stage, the U. S. government is currently evaluating its position. Legal
experts that we contacted noted that appeals can add time and expense.
However, they stated that the WTO?s track record of dispute settlement is
more extensive and better regarded than NAFTA?s, in part because the WTO

Appellate Body helps promote consistency and legal rigor in panel decisions.
Moreover, the WTO Appellate Body has served as an important check in the
system, substantially revising panel rulings against the United States that
raised sovereignty problems. 16 NAFTA?s general dispute settlement process
does not contain an appeals mechanism, and this dispute settlement process
has rarely been used. 17 FTAA governments differ widely on the subject of
the openness (or transparency) of the dispute settlement procedure. The
United States has proposed that FTAA dispute settlement include several
transparency guarantees, such as open hearings; immediate public access to
documents,

such as legal briefs; and opportunities for interested private persons,
organizations, or companies to be notified of the initiation of FTAA dispute
settlement and to provide input into the process. Other FTAA countries not
only oppose the U. S. stance on openness but have proposed language for the
draft FTAA dispute settlement chapter that requires a confidential process
that generally precludes direct or indirect input and participation by
nongovernmental organizations. While not inherently controversial, several
complex issues also face FTAA negotiators on dispute settlement. The first
is known as ?choice of forum? and has to do with who makes the decision
regarding whether the FTAA will be used as the forum to settle a dispute
among FTAA participants and

on what basis. This issue arises because most FTAA participants are members
of the WTO and subregional integration agreements such as NAFTA. These
agreements may contain substantive obligations on the

16 For a discussion of key issues in WTO dispute settlement- namely, its
impact on U. S. sovereignty, its record of securing compliance, its
timeliness in producing decisions, and its transparency (openness)-- see
GAO/ NSIAD- 00- 210. 17 Indeed, the United States tends to choose the WTO
when it has cases against NAFTA partners. In fact, only three NAFTA cases
have actually gone to a panel for resolution.

same topic and provide separate dispute settlement forums. A problem could
arise if (1) jurisprudence built up in one forum that is at odds with
another or (2) a country sought to pursue a complaint about the same measure
in two different forums on the same or different grounds. The United States
has proposed that, as a rule, the complaining country choose the forum in
which to pursue a given complaint and, by that choice, foreclose recourse to
any other forum. However, the U. S. proposal recognizes that in situations
where the FTAA goes beyond the WTO, the

FTAA may express a preference that FTAA dispute settlement be used. Second,
the relationship of FTAA dispute settlement to other agreements can also
affect third- party rights. Third- party rights are the rights of parties
other than the complaining country and the country complained against to
participate in a dispute as a co- complainant or as a third party after
proceedings have been initiated by another country. Problems could arise if
(1) one FTAA country wanted to pursue a complaint about a given measure in
the FTAA and another FTAA country wanted to pursue a complaint about the
same measure in the WTO or (2) an FTAA country proposed to pursue a
complaint under a subregional agreement, such as

NAFTA, to which other FTAA participants did not have access. The challenge
is to minimize multiple litigation while ensuring that all parties? rights
are not diminished. To address this challenge, the United States

proposed that FTAA countries be notified of the intent to file a formal WTO
complaint against an FTAA member?s measure. A third party?s stated desire to
complain about the same measure would give rise to consultations with an aim
to reach agreement on a single forum. The United States also

proposed that if a country failed to join an FTAA dispute as a complaining
party, it would normally forego litigation about the same matter at the WTO
or the FTAA.

Third, making an FTAA dispute settlement system operational will require
resolution of institutional issues and the outcome of negotiations on other
substantive chapters of the FTAA. For example, the WTO has an
institutionalized secretariat that provides considerable support to WTO
dispute settlement. Smaller economies are anxious to ensure that they have
the monetary and technical resources required to participate meaningfully in
FTAA dispute settlement, including secretariat support. The question of
whether the FTAA dispute settlement system will handle all

disputes regardless of which agreement (or chapter) is involved depends on
the outcome of negotiations on other substantive chapters. The alternative
is that the general dispute settlement procedure would be supplemented by
special dispute settlement rules for specific topics or discrete dispute
settlement procedures. 18 A related issue is whether any general or specific
standards of review would apply to guide panels. The WTO, for example,
contains deferential standards of review with respect to antidumping.

Next Steps The negotiating group on dispute settlement has three mandates
for the current phase of FTAA negotiations: (1) prepare a revised draft
chapter for presentation to the TNC by August 2002, (2) submit to the
Technical

Committee on Institutional Issues the negotiating group?s preliminary views
on the institutions needed to implement FTAA dispute settlement mechanisms,
and (3) consider whether proposals for special dispute

settlement mechanisms made by other FTAA negotiating groups are compatible
with the general dispute settlement procedures developed for the FTAA as a
whole and report their conclusions to the TNC or to the

Technical Committee on Institutional Issues, as appropriate. 18 For example,
NAFTA exempts antidumping from the general dispute settlement chapter and
adds special procedures regarding disputes over financial services.

Competition Policy Topic, Importance, and

FTAA countries, including the United States, agree that each FTAA
Negotiating Mandate

signatory should implement measures to proscribe anticompetitive business
conduct but disagree over the level of detail needed in the agreement.
Competition policy, a new legal area for most FTAA participants, consists of
the rules and regulations that foster a competitive environment in a
national economy, partly through more efficient allocation of resources.
Competition policy laws, also referred to as antitrust laws, typically
address price- fixing, the misuse of market power by monopolies, and the
control of mergers and acquisitions. Only 12 of the

34 FTAA countries currently have such laws, 19 and current agreements in the
Western Hemisphere treat competition policy in differently. 20 For example,
the Andean Community and CARICOM have adopted supranational institutions to
deal with regional competition disputes. Mercosur seeks to build a common
competition policy framework among its members. NAFTA promotes a
strengthening of national competition policy laws and increased cooperation
among national competition agencies.

The competition policy group was established to develop rules to guarantee
that the benefits of FTAA liberalization are not undermined by
anticompetitive business practices. Specifically, the group has been
mandated to (1) establish competition policy juridical and institutional
coverage at the national, subregional, or regional level and (2) develop
mechanisms that promote competition policy and guarantee the

enforcement of regulations on free competition among and within countries of
the hemisphere. Progress to Date As of July 3, 2001, the 15- page draft text
contained sections on what competition law should look like, how official
monopolies and state

19 Countries in the Western Hemisphere that currently have competition
policy laws include Argentina, Brazil, Canada, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Panama, Peru, the United States, and Venezuela. 20
Competition policy is not currently covered by the WTO, although the
organization has formed a working group on the topic.

enterprises should be treated, what national and subregional institutions on
competition policy should cover, what mechanisms for cooperation and
exchange of information should exist, what type of dispute settlement might
be appropriate for the provisions in the chapter, and what technical
assistance is necessary. Significant Issues FTAA countries disagree over the
level of detail the FTAA agreement

should provide on the implementation of competition policy law and the
formation of competition policy agencies. All FTAA countries, including the
United States, believe that each FTAA country should have a competition
agency at the national or subregional level responsible for the

enforcement of antitrust laws. However, they disagree over how much detail
is needed to define competition policy and develop competition policy
agencies. The United States, seeking minimal detail, does not believe it is
appropriate to specify detailed provisions on the substantive coverage of
antitrust laws. Other countries have submitted detailed proposals that seek
to identify specific actions that qualify as anticompetitive. One FTAA
expert explained that other countries prefer greater detail either because
it is helpful for their civil code legal systems,

as opposed to common law in the United States, or because they fear they
would not get adequate resources for the implementation of competition
policy from their home country governments without strong language in the
FTAA agreement. FTAA countries also have not reached agreement on what type
of dispute

settlement procedures should be developed to oversee the implementation and
operation of competition policy laws within the hemisphere. The draft text
currently contains two alternative proposals on dispute settlement- one that
calls for disputes to be settled through the general FTAA dispute settlement
mechanism and another that calls for the development of a Competition Policy
Review Mechanism. The United States supports the creation of a forum within
the FTAA to provide a peer review of each FTAA country?s implementation of
the competition policy chapter and to serve as a venue for the discussion of
competition policy issues. According to a U. S. government negotiator, other
countries also prefer an FTAA peer review of competition policy laws and
implementation in lieu of a binding dispute settlement process because they
fear that dispute settlement would subject their national laws to
supranational judgments. If formed, the peer review mechanism also could
serve as the oversight body for the implementation

of the competition policy chapter and a mechanism for providing technical
assistance.

Next Steps Ministers mandated the competition policy group to reach
agreement on as much of the text as possible by August 2002. Some FTAA
experts stated that it would be relatively easy to negotiate the competition
policy chapter because countries differ only on the level of detail, not the
text?s major thrust and purpose. They believe the group may be able to
eliminate many, but not all, of the brackets during this negotiating phase.
In addition, language from new trade agreements such as the recently
concluded Canada- Costa Rica trade agreement may also be submitted for
consideration.

Chapt er 4

FTAA Efforts to Address Crosscutting Themes FTAA ministers have taken steps
to address three themes that cut across the FTAA negotiations- smaller
economies, e- commerce, and civil society- creating ?non- negotiating
groups" to address them. These groups serve as a conduit for information but
do not produce text on trade rules as do the negotiating groups. The theme
of smaller economies is significant because many FTAA countries consider
themselves small or developing. While FTAA countries have agreed to take
differences of size and levels of development into account in negotiating
the FTAA, they have not agreed on what form this treatment should take. E-
commerce is an emerging theme that intersects the negotiations on market
access, services, and IPR. The third crosscutting theme, civil society, has
been controversial. To foster public support for the FTAA, ministers have
solicited input on the FTAA

from business and other nongovernmental groups within the Western
Hemisphere, collectively known as civil society. However, many observers
questioned the negotiators? commitment to transparency and willingness to
use the public input. Table 3 provides an overview of the three crosscutting
themes. The remainder of this chapter describes each of these themes, its
importance, and the group?s mandate; progress to date; significant issues;
and next steps.

Table 3: Overview of Crosscutting Themes in the FTAA Negotiations Topic
Significance Mandate Next steps

Smaller economies As many as 25 of the 34 Follow FTAA process; provide

November 2001 - Assist TNC in developing countries could be recommendations
on smaller

guidelines for the treatment of smaller economies. considered smaller

economy issues. economies.

E- commerce New and growing area for Forum to share experience, October 2002
- Submit recommendations to trade most participants. provide input to
process. ministers on e- commerce.

Civil society Key to securing public Solicit and transmit views of civil
September 2001 - Develop options to foster support, participation in
society. communication with civil society. process.

Source: GAO analysis.

Smaller Economies Theme, Importance, and

By various estimates, as many as 25 of the 34 FTAA countries could be
Mandate

considered to be smaller or developing economies. These economies are

generally characterized by a high degree of trade openness, a lack of
economic diversity (high dependence on only a few industries for exports), a
dependence on trade taxes for government revenues, and relatively small
firms. The treatment of these economies is a crucial crosscutting theme in
the FTAA negotiations because smaller economies are concerned about their
ability to effectively implement and benefit from a new agreement. According
to some experts, these participants are concerned that they may

not have sufficient resources to implement new trade obligations. Countries
that base much of their government revenues on tariffs, for example, may
have difficulty finding alternative sources for that revenue if tariffs are
phased out. These participants are also concerned that the very

factors that make trade beneficial to small countries may make it difficult
for some of them to achieve these benefits under the agreement. For example,
the dislocation of a key sector has a proportionately larger impact on a
small economy than on a larger, more diversified economy. Because so many
FTAA participants consider themselves to be small or

developing, the theme of smaller economies has repeatedly been discussed
throughout the negotiations. At their first ministerial in Denver, Colorado,
in 1995, FTAA countries, including the United States, acknowledged the

wide differences in levels of development and size of economies, and pledged
to actively look for ways to provide opportunities to facilitate the
integration of smaller economies and increase their level of development.
FTAA countries have repeatedly reaffirmed this principle in subsequent

meetings. One step that ministers took to address the concerns of smaller
economies was to form a consultative group on the issue. As set out in the
San Josï¿½ Ministerial Declaration, the Consultative Group on Smaller
Economies was established with a mandate to (1) follow the FTAA process and
(2) provide the TNC with information on issues of concern to smaller
economies and to

make recommendations on these issues. Progress to Date Since its inception,
the consultative group has served as a forum for the discussion of issues
relevant to smaller economies. For example, certain

FTAA countries have begun sharing their negotiating group proposals on
smaller economies in the group?s meetings. In addition, the group has served
as a mechanism for the discussion and coordination of technical assistance.
The Tripartite Committee prepared a technical cooperation needs assessment
for the group, which outlines the technical assistance needs of 17 of the
FTAA participants. The group also has invited

prospective donors to share any information they may have on their technical
assistance programs. In addition to the consultative group, ministers have
directed the negotiating groups to take the concerns of smaller economies
into account in their negotiations. All negotiating group texts contain
proposals on technical assistance or treatment for smaller economies. For
example, the draft text on competition policy contains a section on
technical assistance provisions to help countries develop and implement
competition policy laws and institutions. Similarly, the market access draft
text contains proposals for safeguard provisions that, under certain
circumstances, would exempt products from smaller economies from the
safeguard measures applied by other FTAA countries.

Significant Issues The term ?smaller economy? within the context of the FTAA
has not been defined. Although various methods exist to identify the size of
economies, including population, land area, and gross domestic product, each
method

produces a different set of countries. While these different sets do
overlap, not all countries designated small by one method are considered
small by others. For example, a 1998 study states that per capita gross
domestic product in the Bahamas, which has only 0.16 percent of Brazil?s
land area, is three times larger than Brazil?s per capita gross domestic
product. According to one FTAA expert, the smaller economies group tried to
define a ?smaller economy? in the FTAA context but failed to agree on a
single definition. To solve this dilemma, the United States has proposed
that the

treatment of smaller economies be decided on a case- by- case basis in the
negotiations instead of grouping countries by a single definition. Other
countries oppose this plan because they feel it may exclude them from
receiving special consideration that they might otherwise receive under a
categorical definition. The type of treatment that countries with smaller
and less developed economies will receive under the FTAA has not been
determined. The WTO allows for the special and differential treatment 1 of
developing countries by giving them longer time periods to implement tariff
1 The term ?special and differential treatment? is the product of the
coordinated political

efforts of developing countries, which began as early as 1947- 48. These
efforts were to correct the perceived inequalities of the postwar
international trading system by introducing preferential treatment for
developing countries.

reductions, more favorable thresholds for applying certain commitments such
as countervailing duties, and greater flexibility with regard to certain
obligations. Under the FTAA negotiations, decisions about the treatment of

smaller or developing economies will be important for the tariff and
nontariff barrier modality discussions because they are supposed to define
which countries may be eligible for what type of treatment. All FTAA
countries agree that the rights and obligations of the FTAA need to be
assumed by all countries participating in the process. However, the United
States and others recognize that some countries may need longer phase- in
periods to effectuate such rights and obligations. Other countries would
like to see more aggressive and categorical treatment of smaller economies,
similar to what has occurred under the WTO.

In addition to special treatment, smaller economies are seeking technical
assistance to strengthen their participation in the negotiations and
increase their ability to carry out FTAA objectives. Developing countries
have already faced resource constraints in their attempts to carry out
existing international trade obligations under the WTO. According to U. S.
officials, smaller FTAA economies, particularly the Caribbean nations, have
been

vocal about their need for technical assistance and have influenced some
negotiating dates due to their concerns over resource constraints. The
Tripartite Committee has already provided several countries with assistance
in preparing for the negotiations and in implementing FTAA

business facilitation measures. Several negotiating groups have incorporated
into their texts specific language on technical assistance. The United
States would like to see the smaller economies group spend more time on the
issue of technical assistance, with countries identifying their technical
assistance needs through their country- specific proposals. Next Steps An
important step concerning smaller economies during the next

negotiating phase will be the development of guidelines for the treatment of
differences in size or level of development. The Buenos Aires declaration
states that the TNC, with the assistance of the consultative group, must
develop no later than November 2001 some guidelines or directives for
negotiating groups to apply treatment that takes into account differences in
levels of development and size of economies. The smaller economies group is
currently in the process of developing

recommendations on these guidelines, which it will forward to the TNC in
September 2001.

Another important next step involves the provision of technical assistance.
At the Buenos Aires Ministerial, the United States and the IDB indicated
that they would further explore ways to meet these technical assistance
needs. Their success in identifying funding for smaller economies may affect
the negotiations, if smaller economies feel their technical assistance needs
are not being met. E- commerce

Theme, Importance, and As e- commerce and the use of the Internet have
expanded over the past Mandate

several years, trade negotiators have begun to grapple with how existing
trade agreements cover these activities and whether new commitments are
needed. Since the development of e- commerce is relatively new, few
government regulations or border measures currently exist to control the
flow of electronic transmissions. FTAA governments generally share the goals
of fostering a supportive environment and maintaining an open trading regime
for e- commerce. The United States, as a leading user and developer of e-
commerce, has a commercial interest in expanding its use and maintaining an
open trading environment for digital products and services. Other FTAA
partners also perceive economic and social benefits from expanded use of e-
commerce and the Internet for their own countries

and want to remain technologically integrated into the global economy. To
address their mutual interests in developing a digitally connected
hemisphere, trade ministers established the Joint Government- Private Sector
Committee of Experts on Electronic Commerce in 1998. The committee?s mandate
is to make recommendations to the ministers on how to increase and broaden
the benefits to be derived from the electronic marketplace. However, the
committee is a non- negotiating group and will not develop rules for the
FTAA agreement.

Progress to Date Made up of government and private sector representatives,
the joint committee has provided ministers with recommendations on issues
related to its mandate. The committee has also provided a forum for
countries to share their experiences and develop approaches to encouraging
the development of e- commerce activities. The committee has issued two

public reports that made recommendations on topics such as strengthening
information infrastructure; increasing participation of governments, smaller
economies, and small businesses; clarifying the rules of the market;

developing on- line payment services; and addressing certification and
authentication issues. Participants say that the committee has provided a
useful role in facilitating information sharing among FTAA countries on best
practices and e- commerce concerns.

Significant Issues E- commerce issues are closely connected to several areas
of the FTAA negotiations, including market access, services, IPR, and
government procurement. Since the FTAA e- commerce group is a non-
negotiating group, any commitments countries want related to e- commerce
must be agreed on in one of the negotiating groups. For example, competition
among Internet service providers and access to telecommunications

networks are issues likely to be addressed in the services negotiating
group. Protection of copyrighted materials and original works distributed
over the Internet would be addressed in the IPR negotiating group. Market
access negotiations on goods also may entail e- commerce- related issues
because certain goods, such as books and videos, can be transmitted

digitally or shipped physically. 2 Because many countries, including the
United States, use e- commerce to conduct government procurement, issues may
also arise in the negotiating group on government procurement. Negotiators
must be aware of the interrelationship between e- commerce issues and their
specific topic because the use and efficiency of e- commerce transactions
rely on an open environment across all steps in the production, marketing,
sale, and distribution of a product. For example, if a country maintains an
open telecommunications environment with high levels of Internet use, e-
commerce still can be stymied if the

country?s custom procedures are onerous and deter shipments of small
packages. In addition, negotiators also need to be aware of any ecommerce-
related decisions made at the WTO or other multilateral fora since they may
have an impact on the FTAA negotiations.

Next Steps At the April FTAA ministerial, trade ministers instructed the
joint committee to continue to identify and review specific issues. The 2
Discussions are ongoing in the WTO over the classification of digital
products. Some countries recommend their classification as goods, others as
services. The United States argues that these products should receive the
most liberal treatment possible and that, before deciding on classification,
more information is needed on the potential impact of the various options.

committee also recommended that it continue to share national experiences
and broadly analyze the factors that led to their success or failure. The
joint committee?s work for the third phase of discussions will address the

 digital divide,  consumer protection, and  e- government and other
issues.

Civil Society Theme, Importance, and

The views of civil society groups (nongovernmental groups representing
Mandate

business, labor, environment, and other interests) will likely affect the
level of U. S. public support for the FTAA. Although multilateral trade
agreements, such as the FTAA, are conducted at a government- togovernment
level, public support for the outcome is an important factor in generating
the political will to conclude an agreement. Civil society parties

thus need information about the progress of the negotiations and a vehicle
for expressing their viewpoints. At the outset of the negotiations, the
ministers committed to a transparent process and welcomed the contributions
of the private sector. 3 In 1998, at the San Josï¿½ Ministerial, the trade
ministers reaffirmed their commitment to transparency to facilitate the
constructive participation of different sectors of society. The ministers
formed the Committee of Government Representatives on the Participation

of Civil Society with a mandate to receive civil society views on trade
matters and present them to the ministers. Progress to Date The committee
pursued its mandate by soliciting the views of civil society

on two occasions through a formal submissions process. Acceptable
submissions had to meet a specified format and present the views
constructively. The committee issued an open invitation; countries also
solicited input through their own national mechanisms. For example, the
United States solicited input via the Federal Register process, through the

Internet, and by direct solicitation. The first round of submissions 3 As
stated in the first FTAA Ministerial Declaration in Denver, 1995.

occurred before the Toronto Ministerial in 1999 and garnered about 60
acceptable responses from civil society groups in the hemisphere. A second
round of submissions in 2000 before the Buenos Aires Ministerial resulted in
77 acceptable responses. In both cases, the committee submitted a report on
the results at the ministerial meetings.

The United States has championed this theme, in part because the committee
on civil society provides a vehicle for discussing labor and environmental
issues in the FTAA. The United States had sought to create an FTAA study
group to address the relationship between the FTAA?s goals and labor issues,
but many other FTAA countries objected, arguing that labor issues were more
appropriately addressed in another international

forum such as the International Labour Organization. In addition, according
to FTAA experts, some countries believe that participants bear the
responsibility of taking their citizens? views into account and are

skeptical of the value of including civil society input in the negotiations.
The committee?s formation provided a compromise solution. Open to
submissions on an array of FTAA- related topics, the committee gives
organizations and individuals interested in the FTAA a way to voice their
concerns within the FTAA process.

Significant Topics As the negotiations enter the next phase, three aspects
of the discussion on the participation of civil society in the FTAA process
are worth noting. These are the transparency of the process, the difficulty
the committee has had in reporting submissions by civil society, and the
extent to which submissions are considered by negotiating groups. First, the
level of transparency in the negotiation process has been in question. While
the FTAA ministers continue to declare that they are committed to a
transparent process that facilitates the constructive participation of
nongovernmental sectors, the specific means to do so had not been spelled
out before the Buenos Aires Ministerial. As a result, nongovernmental
organizations and business and government representatives in the United
States and elsewhere in the hemisphere criticized the FTAA process as
lacking transparency. For example, although USTR released public summaries
of U. S. positions, 50 Members of Congress, along with business
representatives and nongovernmental organizations, all called for the
release of the actual negotiating text. U. S.

negotiators hope that the implementation of new outreach measures will go
some way toward dampening the criticism that the process lacks transparency.

In response to broad demands for a more transparent process, the FTAA
ministers agreed on April 7, 2001, in Buenos Aires to publicly release the
draft text of the nine negotiating groups. They determined that publication
of the text would help increase the transparency of the negotiating process
and help build broad public support for the FTAA. The text, which had

been negotiated in English and Spanish, was translated into French and
Portuguese and released to the public on the FTAA internet site on July 3,
2001. 4 This text gives a snapshot of the status of the FTAA negotiations as

they stood as of the Buenos Aires Ministerial, including the range of topics
and proposals before the negotiators. The publicly released text is the same
text from which negotiations are now proceeding, according to USTR. Because
the text is heavily bracketed, it may be difficult for outside observers to
understand or to assess potential areas of agreement or consensus. In
addition, the FTAA governments agreed not to include country identifiers in
the text in order to keep the negotiations more fluid. Further, there is no
guarantee that future revisions to the text will be made

available to the public. This is important for two reasons. Entirely new
proposals may be made, and the text is likely to change significantly as the
negotiating groups work to eliminate brackets and duplication. Second, the
committee has had difficulty in reaching consensus on how to report the
results of public submissions through the TNC to the trade ministers. This
indicates the sensitivity of discussions about civil society in the FTAA as
well as the challenges associated with a process run by consensus. During
the first round of submissions, one FTAA country

blocked the committee from preparing recommendations on the basis of the
public input received, which was an objective sought by the United States.
The committee?s report was thus limited to statistical information about the
submissions with minimal description of the contents, according to U. S.
officials. During the second round of submissions before the Buenos Aires
Ministerial, the committee again had difficulty reaching consensus on the
reporting issue, but eventually reached a compromise. The committee?s report
to the TNC on the second round of submissions provided a more comprehensive
and descriptive summary of the input.

4 The draft FTAA text can be accessed at www. ftaa- alca. org/ Alca_ e. asp.

Third, some are concerned about the extent to which the public submissions
are considered by the negotiating groups. Civil society representatives we
interviewed told us that they were disappointed because there was little
evidence that their input was being given serious consideration in the
negotiations. Since the ministers had not initially directed that the civil
society submissions be provided to the negotiators, the submissions were
channeled through the committee. Negotiators theoretically could request the
submissions through the committee, but U. S. officials noted that due to
translation and logistical problems, the U. S. negotiators who were
interested in considering the submissions were forced to rely on executive
summaries rather than the complete submissions. 5 The negotiators during the
next phase of the negotiations

should have access to civil society submissions because, at Buenos Aires,
the FTAA ministers directed the committee to transmit the submissions to the
appropriate negotiating groups. The United States has been actively

pressing for each negotiating group to consider civil society input,
according to U. S. negotiators. Next Steps The participation of civil
society in the FTAA process is expected to

increase following the Buenos Aires Ministerial, according to U. S.
officials. The FTAA ministers declared in Buenos Aires that the committee
was ?to foster a process of increasing and sustained communication with
civil society, to ensure that civil society has a clear perception of the
development of the FTAA negotiating process.? To do so, the committee as
instructed to take the following steps:

 develop a list of options to increase and sustain communication with civil
society for consideration by the TNC at its next meeting in September 2001;
 forward to the nine negotiating groups the submissions made pertaining

to their respective issues;  forward to the nine negotiating groups the
submissions related to the

FTAA process in general; and  invite civil society groups to present their
conclusions about the FTAA

negotiations from other fora and seminars within the hemisphere. 5 The
executive summaries of the civil society submissions can be viewed on the
Department of State?s Internet site at http:// www. state. gov/ www/ issues/
economic/ ftaa/ 0011_ ftaa_ summaries. html.

The ministers did not explicitly request another round of formal civil
society submissions after the ministerial. U. S. officials stated that the
committee is going to consider a variety of approaches as it develops its
list of options for the TNC to consider, including, among others, the
possibility of a third open invitation to civil society. Options may also
include

seminars, outreach briefings in the hemisphere, and other methods for
providing information to the public on the progress of the negotiations. In
addition, according to FTAA experts, other FTAA participants are being much
more supportive of the civil society committee than they were earlier in the
process. U. S. negotiators believe that by providing a means to communicate
civil society views to ministers, the committee also offers an

opportunity to begin to build broad- based support within the hemisphere for
an eventual agreement.

FTAA Would Secure and Expand Trade Access

Chapt er 5

and Rights for the United States A comprehensive FTAA would unite a diverse
set of economies into the world?s largest trading bloc involving nearly 40
percent of the world production and significant shares of U. S. trade and
investment. Such an agreement would benefit U. S. exporters by reducing some
relatively high trade barriers on U. S. exports to the region. By
comparison, most FTAA exports to the United States entered duty- free in
2000. However, some U. S. import- competing industries, such as textiles,
apparel, and certain agricultural goods, have traditionally received higher
levels of protection. These industries would face increased competition and
potentially lower production and employment if current U. S. barriers were
lowered. The overall impact on the U. S. economy of removing U. S. and other
FTAA countries? tariff barriers may be relatively small since the total U.
S. trade with non- NAFTA FTAA countries is only about 1 percent of the $11
trillion U. S. economy. An FTAA agreement, however, would cover much more
than merchandise trade. Services, investment, IPR, and government
procurement are commercially important areas in which the United States may
gain improved market access and privileges. The FTAA would provide

new coverage in investment and government procurement because the United
States currently has only a few bilateral agreements with other FTAA
countries in those areas. The United States also hopes to expand coverage in
services and IPR beyond existing WTO agreements.

U. S. trade and investment in the Western Hemisphere have increased rapidly
over the past decade. Over 80 percent of U. S. merchandise trade and about
half of services trade and investment in the region are with NAFTA partners
Canada and Mexico. However, merchandise trade with non- NAFTA FTAA countries
has more than doubled over the past decade,

and services trade and FDI have increased in both value and share relative
to the rest of the world. Figures 7, 8, and 9 show the shares of U. S.
merchandise trade, services trade, and FDI with key trade partners. Appendix
I provides more information on current U. S. trade and investment with FTAA
countries.

Figure 7: U. S. Merchandise Trade With Key Trade Partners, 2000

Japan China

6% 11%

33%

FTAA (NAFTA)

19% 25%

6%

FTAA (non- NAFTA) Rest of the world EU

$1, 917 billion

FTAA countries Note: Merchandise trade is exports plus imports of industrial
and agricultural goods. Source: GAO analysis of U. S. Department of Commerce
data.

Figure 8: U. S. Trade in Services With Key Trade Partners, 1999

EU Rest of the world

26% 34%

14%

FTAA (NAFTA)

13%

FTAA (non- NAFTA)

11%

Japan

2% China

$430 billion

FTAA countries Note 1: Services trade is exports plus imports of cross-
border private (nongovernment) commercial services. Note 2: The most recent
year available for services data was 1999. Source: GAO analysis of U. S.
Department of Commerce data.

Figure 9: The Stock of U. S. Foreign Direct Investment in Key Trade
Partners, 1999

EU Rest of the world

26%

FTAA (NAFTA)

13% 45%

11%

FTAA (non- NAFTA)

4%

Japan

1% China

$1, 133 billion

FTAA countries Note: The most recent year available for investment data was
1999. Source: GAO analysis of U. S. Department of Commerce data.

Liberalization of Over the past decade, FTAA countries have pursued the
liberalization and

Merchandise Trade integration of their economies through a wide variety of
interregional free trade and customs union agreements. These changes have
lowered

Would Bring New barriers to U. S. exports, but tariffs and other barriers
still remain relatively Opportunities for U. S.

high on many U. S. exports. FTAA countries? overall average tariff rates are
Exporters and about twice that of the United States, with about one- third
above 10 percent. Barriers on agricultural products are generally higher
than Increased Competition

industrial goods. Some U. S. products also face higher tariff rates than in
Some Protected U. S. other competitors that have preferential access to some
FTAA markets

through subregional trade agreements. For FTAA countries, the U. S. Sectors
market is relatively open with 87 percent of FTAA imports entering dutyfree
and an average trade- weighted U. S. tariff on FTAA imports of less than 1
percent. 1 However, the United States maintains high barriers on certain
agricultural products, such as sugar, peanuts, and citrus, and on textiles
and apparel products, which are important exports of various FTAA countries.
For some of these products, imports are limited by quota or by

prohibitively high tariffs after an initial quantity has been imported.
Reductions in these barriers may increase imports, lower prices, and reduce
U. S. production. FTAA negotiations also include antidumping measures, which
place additional duties on products if a country finds that the products
have been sold at less than their normal value. Changes in antidumping rules
may have mixed results for the United States because it is the country that
has initiated the most cases and had the most cases initiated against it
within the FTAA region. Overall, some economic studies suggest that the
elimination of tariff and nontariff barriers in the region would likely have
a small impact on the U. S. economy because of the relatively small size of
U. S. trade with the region compared with U. S. production. FTAA May Benefit
U. S.

The FTAA could expand opportunities for U. S. exporters by removing tariff
Exporters by Eliminating and nontariff barriers on U. S products. Average
tariff levels in the region

Remaining Duties on U. S. fell from over 40 percent in the mid- 1980s to 12
percent in the mid- 1990s,

Products prompting sizable increases in both intra- and extra- regional
trade flows,

according to the IDB. In 1985, Brazil?s simple average tariff rate was 51 1
Trade- weighted average tariff rates are the average of all tariffs on
imported products multiplied by the share of total imports accounted for by
each product. Therefore, products that account for more trade are weighted
more in the overall average. If these products have high tariff rates, then
the average will be higher than a simple unweighted average

tariff.

percent, while Argentina?s was 35 percent. In 1999, these rates fell to 14
and 11 percent, respectively. Current tariff averages for FTAA countries are
generally significantly lower than the averages during the 1980s and early
1990s. However, compared with the U. S. and Canadian simple average tariff
rates of less than 5 percent, other FTAA countries? rates are still
relatively high.

Some countries, such as Chile and Bolivia, have relatively uniform tariff
schedules that apply an across- the- board rate for most products, with some
exceptions. Chile recently lowered its uniform rate from 9 to 8 percent on
January 1, 2001. It is scheduled to continue lowering the rate until it
reaches 6 percent in 2003. Other countries tend to apply a wider range of
rates, with the highest duties applied to sensitive products. Brazil, for
instance, charges its highest duties (35 percent) on automobile parts;
Nicaragua charges rates between 45 to 55 percent on certain types of corn
and rice imports; and Canada maintains out- of- quota tariff rates of over
250 percent on certain dairy imports. 2 In addition, only Canada, Costa
Rica, El Salvador, Panama, and the United States have agreed to eliminate
tariffs on

certain high- technology products through the WTO Information Technology
Agreement. These products are important exports for the United States, and
some countries, including Brazil, maintain high tariffs on them.

In addition to lowering the tariff rates that exporters are currently
charged, the FTAA would also commit countries to not raise these rates in
the future. Through their WTO commitments, FTAA countries have already bound
most of their tariffs at certain levels. However, in many cases these

bound rates are relatively high and countries charge much lower rates in
practice. A World Bank study found that for the 10 Latin American countries
it examined, the overall trade- weighted average bound rates ranged between
25 and 57 percent and were at least two or three times as high as the
current rates the countries charged. Under WTO rules, countries can increase
their current rates to their bound levels at any time. The FTAA would reduce
these higher bound rates, in many cases to zero, and provide additional
certainty for FTAA exporters.

2 Out- of- quota tariffs are part of tariff- rate quotas that some countries
apply to agricultural goods. A tariff- rate quota allows a certain amount of
a product to be imported at a generally low ?in- quota? rate. Any additional
imports face a higher out- of- quota duty.

Agricultural Trade May Be U. S. agricultural exporters also stand to gain
from tariff elimination More Affected by FTAA

through the FTAA. Since agricultural tariffs are generally higher than those
Because Current Barriers on industrial goods, the FTAA may lead to more
substantial changes in Tend to Be Higher

agricultural trade than in other sectors. For example, Costa Rica?s average
tariff on imports of manufactured goods is 5. 4 percent compared with 16.8
percent on agricultural goods. Agricultural tariffs in Barbados, Belize,
Guyana, and Jamaica all average over 20 percent and are generally twice the
average tariff on industrial goods. Table 4 shows simple average tariff
rates across FTAA countries for all agricultural and industrial goods. The

pattern of higher tariffs on agricultural goods holds true for all FTAA
countries except Chile and the Mercosur countries of Argentina, Brazil, and
Uruguay. For Mercosur countries, protection of certain industrial goods,
such as automobiles, raises their average rates on industrial goods slightly
higher than tariffs on agricultural goods. The bound rates that countries

committed to in the WTO are even higher, with the average across all
agricultural goods in South America at 39 percent, in Central America at 54
percent, and in the Caribbean Islands at 86 percent. The U. S. Department of
Agriculture?s Economic Research Service estimated that elimination of
agricultural barriers would lead to the expansion of U. S. exports to FTAA
countries by 8 percent in the first 5 years and an increase in U. S. imports
from FTAA countries by 6 percent. The study predicted that U. S. exports of
wheat to Brazil and exports of corn, soybeans, and cotton across the
hemisphere would increase.

Table 4: Average Tariff Rates for All Agricultural and Industrial Goods All
goods

Agriculture Industrial Country Year (percent) (percent) (percent)

Argentina 1999 11.0 10.4 11. 0 Barbados 1999 13.6 20.2 12. 0 Belize 1998 9.
2 21.0 8. 2 Bolivia 1999 9. 7 10.0 8. 9 Brazil 1999 13.6 10.8 13. 9 Canada
1999 4. 6 4.6 4. 5 Chile 1999 10.0 10.0 10. 0 Colombia 1999 11.6 13.1 11. 6
Costa Rica 1999 7. 2 16.8 5. 4 The Dominican 1997 14.5 15.3 14. 2 Republic
Ecuador 1999 11.6 15.5 11. 0

El Salvador 1998 5. 7 10.0 4. 4 Guatemala 1999 7. 6 10.7 7. 0 Guyana 1998
10.4 23.1 9. 3 Honduras 1999 8. 1 12. 2 7. 5 Jamaica 1999 8. 7 21.6 6. 6
Mexico 1999 10.1 11.5 10. 0 Nicaragua 1999 11.0 16.4 10. 3 Panama 1998 9. 2
11.4 8. 5 Paraguay 1999 9. 0 10.2 9. 0 Peru 1998 13.2 14.7 13. 0 Trinidad
and Tobago 1998 9. 2 20.0 8. 4 The United States 1999 4. 8 8.7 4. 3 Uruguay
1999 4. 6 4.2 4. 7 Venezuela 1999 12.0 12.5 11. 9 Note: Data were not
available for nine FTAA countries. Averages are the simple average ad
valorem tariff rate across all goods or agricultural and industrial goods.

Source: World Bank data.

Certain agricultural products also tend to face trade- distorting measures,
such as price bands and export subsidies, which the FTAA may address. For
example, the United States has initiated a WTO dispute case against Canada
over its export programs involving dairy products and has initiated

a review of the Canadian wheat marketing board to determine how its status
as a state- trading monopoly may restrict competition and harm U. S.
producers. Chile has used complex price bands, which apply additional duties
on imports, to maintain domestic prices within a certain range for wheat,
wheat flour, edible vegetable oils, and sugar. For example, due to recent
low international prices for wheat products, Chile applies duties as high as
90 percent on imports of wheat, a key U. S. export. FTAA

negotiations may address these and other agricultural trade practices that
distort domestic and international markets. Negotiators already have reached
agreement on the elimination of agricultural export subsidies, another
trade- distorting practice. The WTO agriculture agreement allows exports
subsidies, but only if the WTO is notified and the subsidies are reduced
over time. 3

FTAA May Eliminate Proponents of the FTAA argue that it will eliminate the
disadvantage U. S. Disadvantages That U. S.

exporters face from subregional agreements within the hemisphere and Exports
Face Due to

help them maintain or expand market share. Subregional trade agreements
Subregional Trade have proliferated in the Western Hemisphere as part of a
larger reform process undertaken by many FTAA countries that has included
lowering

Agreements tariffs on all partners. However, for those countries that are
members of free trade agreements or custom unions, duties are even lower or
are

eliminated. 4 The United States is only party to one (NAFTA) of numerous
trade agreements in the region. USTR, the U. S. Department of Agriculture,
and some business associations have cited the Chile- Canada free trade
agreement as an important example of how U. S. exports are disadvantaged
because the agreement provides preferential access for Canadian products in
sectors such as forest products, wheat, vegetable oils, and potatoes.

Both Canada and the United States are major producers of these products and
compete in Chile and elsewhere. In addition, the EU has recently 3 Of the
FTAA countries, only eight have notified the WTO of export subsidies. These
countries are Brazil, Canada, Colombia, Mexico, Panama, the United States,
Uruguay, and Venezuel a. 4 Because trade may be diverted from the most
efficient suppliers to less efficient ones with preferential access,
subregional agreements may have some negative effects in addition to the
traditional benefits associated with trade liberalization.

concluded a free trade agreement with Mexico and is pursuing negotiations
with Chile and Mercosur. An FTAA might, however, undercut existing U. S.
trade preference programs by eliminating similar disadvantages faced by some
FTAA countries in the U. S. market compared with Canada and Mexico through
NAFTA. For example, Congress recently improved textile and apparel access
for Caribbean Basin countries through the Caribbean Basin Trade Partnership
Act, partly to match the expanded access Mexico achieved through NAFTA.
Andean Community countries have also sought similar provisions, citing lost
sales to Caribbean competitors.

Many U. S. Imports of FTAA For most U. S. sectors, tariff liberalization
through the FTAA would likely Products Will Face Limited

have a limited impact on U. S. imports. This is because the U. S. market is
Changes Since Most Already already relatively open to imports from FTAA
nations. For example, in Enter U. S. Market Duty- Free 2000, most FTAA goods
entered the United States duty- free or at very low rates. The overall
average tariff rate on products entering the U. S. market is less than 5
percent. 5 However, the United States also provides countries with further
tariff reductions on certain products through several

specialized programs. These include nonreciprocal trade preference programs,
such as the Generalized System of Preferences, and reciprocal trade
preference programs, such as the Agreement on Trade in

Pharmaceutical Products. 6 Most of these programs offer duty- free entry or
very low tariff rates on a range of products. Therefore, the average tariff
rates facing many countries? products imported by the United States are even
lower than the normal average U. S. tariff rate. For example, the
tradeweighted average U. S. tariff rate on imports from FTAA countries is
only 0.79 percent. 7 However, the trade- weighted tariff rates vary across
countries and regional groups depending on the types of products imported

by the United States. Table 5 shows that NAFTA countries face the lowest U.
S. tariff rates, while Central American countries face the highest overall
average.

5 This is a simple average tariff rate based on ?ad valorem? tariffs (a
percentage of the value of a good) and some ad valorem equivalent rates of
?specific? tariffs (a fee per unit of a good) calculated by the U. S.
International Trade Commission. See Chapter 1, Objectives, Scope, and
Methodology.

6 The nonreciprocal programs include the General System of Preferences, the
Caribbean Basin Economic Recovery Act, the Caribbean Basin Trade Partnership
Act, and the Andean Trade Preference Act. Reciprocal trade preference
programs include the Automotive Products Trade Act, the Agreement on Trade
in Civil Aircraft, the Agreement on Trade in Pharmaceutical Products, and
the Uruguay Round Concessions on Intermediate Chemicals for Dyes. For more
information on nonreciprocal trade preference programs, see GAO- 01647.

7 Trade- weighted tariff averages place lower weights on products that are
imported less. Since prohibitively high tariffs and quotas restrict imports
of a product, the product?s tariff is weighted less in the overall average.
Therefore, trade- weighted averages can understate the importance of high
tariff rates or quotas on products that might be imported more if barriers
were lowered.

Table 5: Trade- weighted Tariff Averages for U. S. Imports From FTAA
Countries All products Regional group (percent)

Andean Community 0.91 CACM 10. 38 CARICOM 2.67 Mercosur 2.02 NAFTA 0.27
Other 6.09

Total FTAA 0.79

Note: ?Other? category includes Chile, the Dominican Republic, and Panama.
Source: GAO analysis.

About 87 percent ($ 376 billion) of FTAA imports entered the United States
duty- free in 2000. Another 7 percent paid duties between 0 and 5 percent,
and only about 3 percent faced duties of above 15 percent. Through NAFTA,
Canada and Mexico had an even higher share of their products (94 percent)
enter duty- free. The Andean Community and Central American nations had the
lowest shares of duty- free products, with about 40 percent of their imports
facing no duties. Table 6 shows the share of imports facing different ranges
of tariff rates by each regional group.

Table 6: Share of Imports Facing Different Ranges of Tariff Rates for Each
FTAA Regional Group, 2000 Share of U. S. imports facing tariffs that are:
Share of duty- free

Between 0 Between 5

Between 10 Greater U. S.

and 5 and 10

and 15 than 15 Regional group

imports percent

percent percent

percent

Andean 39. 7% 55. 7% 0.5% 0.3% 2.6% Community CACM 40.4 2. 2 7.7 1. 2 47. 9

CARICOM 63. 4 21. 2 1. 6 0. 2 12. 9 Mercosur 61.4 25.9 8. 8 2. 1 1. 4 NAFTA
94.4 2. 3 0.2 0. 1 0. 9 Other 50.9 15.1 6. 1 1. 2 26. 2

All FTAA 86. 9% 7. 1% 0. 9% 0. 2% 2. 9%

Note: ?Other? category includes Chile, the Dominican Republic, and Panama.
Source: GAO analysis of U. S. Department of Commerce trade statistics and U.
S. International Trade Commission tariff schedules.

Some Import- Sensitive U. S. The United States maintains high tariffs on
certain sensitive products

Products May Face whose production may decline if current trade barriers are
reduced and

Increased Competition If competition from imports increases. The tariffs on
some of these products

are as high as 48 percent, and some products are subject to tariff- rate
Barriers Are Lowered

quotas with out- of- quota duties as high as 350 percent. 8 Central American
FTAA countries have the largest share of imports facing tariffs greater than
15 percent. A large portion of these products is accounted for by textile
and apparel goods, which until recently had only limited coverage under
preference programs. Tariff rates on these products generally are between 20
and 33 percent. Textile and apparel products are important exports for
Mexico, Caribbean Basin (including Central America) countries, and Andean
Community countries. Mexico and the Caribbean Basin each account for about
14 percent ($ 9.7 billion) of U. S. apparel imports in 2000 (Andean exports
are very small in comparison). Mexico has preferential access through NAFTA,
and Caribbean Basin exports have recently gained

preferential access through the Caribbean Basin Trade Partnership Act.
However, the United States offers the Caribbean Basin Trade Partnership Act
unilaterally and can withdraw or modify it. Some FTAA countries would prefer
to lock in access to the U. S. market through a reciprocal agreement like
the FTAA.

8 A tariff- rate quota allows a certain amount of a product to be imported
at a generally low ?in- quota? rate. Any additional imports face a higher
out- of- quota duty.

In addition to textiles and apparel, several agricultural products also
receive protection through higher U. S. tariff rates and tariff- rate
quotas. These include products such as tobacco, sugar, peanuts, dairy, and
citrus products. For example, the out- of- quota tariff rate quota is 350
percent for tobacco and is above 100 percent for peanut products. The United
States

also provides domestic support programs for some of these industries,
particularly dairy, sugar, and peanuts. Since limiting access to the market
is essential for maintaining certain price levels, removal of trade barriers
and increased competition from FTAA suppliers will impact these

programs. U. S. Department of Agriculture?s Economic Research Service
reported that, while providing consumers access to more inexpensive imports,
the FTAA might lead to significant declines in U. S. prices and production
in the sugar, peanut, and orange juice markets. Brazil is a major producer
of both sugar and orange juice, and Argentina already supplies over 85
percent of U. S. peanut imports. Sugar also has been a sensitive

product in trade negotiations among Brazil, Argentina, and Chile. 9 If FTAA
Modifies More restrictive rules on antidumping investigations under the FTAA
may Antidumping Rules, Effect

have mixed effects on the United States because it is both the largest on
United States Could Be

initiator and defendant in these cases in the hemisphere. Protections for
Mixed

import- competing U. S. industries, such as steel and fertilizers, might be
more limited. However, U. S. exporters facing antidumping measures abroad
might benefit. U. S. consumers and producers that would gain

access to relatively cheaper imports may also benefit. Although antidumping
duties are only applied on specific products and generally involve a small
share of overall imports, they affect sensitive goods, and the threat of an
investigation may lead exporters to restrain shipments. 10 Proponents of
antidumping argue that it is important to some industries in the United
States as protection against unfair competition when other trade

barriers are lowered. The degree to which the FTAA agreement augments or
modifies WTO provisions in these areas will affect how important the
agreement is to current FTAA countries? practices. The United States has

9 For information on the U. S. sugar program, see Sugar Program: Supporting
Sugar Prices Has Increased Users? Costs While Benefiting Producers (GAO/
RCED- 00- 126, June 9, 2001). 10 For example, the U. S. International Trade
Commission found that all outstanding antidumping and countervailing duty
orders in place in 1991 only affected approximately 1. 8

percent of the total U. S. merchandise imports. The study found that the
overall effect of removing these orders would be a $1. 59 billion net
benefit gain for the United States.

argued for no changes that would restrain the use of antidumping by FTAA
countries (see ch. 3 for more information on antidumping negotiations).

Until the early 1980s, Canada and the United States were the primary users
of antidumping measures. However, Argentina, Brazil, and Mexico recently
have become important users of antidumping measures. Of the 485 antidumping
investigations initiated by one FTAA country against another

between 1987 and 2000, the United States was the largest initiator (with 30
percent of the cases) and the largest defender (with 38 percent of the
cases). Brazil, which was the fourth largest initiator (with 8 percent of
the cases), was the second largest defender (with 21 percent of the cases).
Figure 10 shows the number of cases initiated and defended by the top five
FTAA users of antidumping. U. S. antidumping orders in effect as of April

2001 against FTAA countries include (1) certain steel products from
Argentina, Brazil, Canada, and Mexico; (2) frozen concentrated orange juice
from Brazil; and (3) salmon from Chile. The duties placed on these imports
can be substantial and vary by product. For example, duties on imports from
Brazil of silicon metal ranged between 87 and 94 percent in 2000, and duties
on frozen concentrate orange juice were about 15 percent in 2001. The
largest number of antidumping investigations against the

United States are by its NAFTA partners Canada and Mexico, which account for
73 percent of all cases. Brazil is third with 14 percent, including measures
in effect on certain chemical imports from the United States.

Figure 10: Antidumping Cases Initiated and Defended, by FTAA Country, 1987-
2000 Number of cases

200

182

180 160

147

140 120

103 104

100

84

80

75 61

60

54 48 50

40 40

22

20 0

States Mexico

Canada Argentina

Brazil FTAA

countries United Other Initiated

Defended Source: United Nations Economic Commission for Latin America and
the Caribbean.

Studies Suggest Overall The relatively small size of non- NAFTA FTAA U. S.
merchandise trade

Impact of FTAA compared with the size of the U. S. economy will limit the
overall impact of Merchandise Trade

FTAA tariff liberalization on the U. S. economy. U. S. trade with FTAA
Liberalization on U. S. countries outside of NAFTA was $123 billion in 2000,
only about 1 percent of the approximately $10 trillion U. S. economy.
However, certain sectors Economy Will Be Small

that are relatively more protected (both in the United States and abroad)
may see significant changes in trade flows. 11 For example, some economic
impact studies that use economywide models have found that U. S. exports in
sectors such as furniture, textiles, and clothing and some agricultural
products could increase substantially, while exports in sectors such as
mining, base metals, and petroleum could fall slightly. Likewise, imports of

certain metals, nonelectrical machinery and leather products could increase,
while paper and wood imports could fall. Overall, these studies estimate a
small but positive impact of an FTAA, with an increase in U. S. output
annually of about 1 percent or less. However, the models focus only

on tariff elimination and do not generally include other aspects of the FTAA
agreement that are difficult to quantify, such as services and IPR. 12 Some
supporters of the FTAA argue that U. S. exports to non- NAFTA countries
could grow significantly with a free trade agreement, just as U. S.

exports to Mexico did through NAFTA. While U. S. exports to Mexico and other
FTAA (non- NAFTA) countries in 1990 were about 7 and 6 percent of total U.
S. exports, respectively, exports to Mexico rose to 14 percent ($ 100
billion) of total U. S. exports by 2000. 11 Although trade barriers can be
an important factor in determining how much trade occurs in a particular
product, other factors also are important. For example, as the price of an
import falls when a tariff barrier is removed, the degree to which trade and
production

change depends on how responsive consumers, domestic producers, and foreign
producers are to the change in price. 12 These studies generally do not
capture dynamic effects that may come through specialization and economic
growth.

Comprehensive FTAA The FTAA negotiations involve several areas in which the
United States has

Offers New important commercial interests but has few multilateral and
bilateral agreements with FTAA countries. The United States is the world?s
leading

Opportunities in exporter of services and one of the largest investors in
Latin America. Services, Investment, FTAA countries began liberalizing their
service sectors and opening their Intellectual Property economies to foreign
investment as part of their economic reform programs. However, these reforms
are relatively new and are not yet

Rights, and bound by international or bilateral commitments with the United
States, as Government

they would be under an FTAA. Also, as the leading producer of software,
pharmaceuticals, and other cutting- edge technologies, protection of IPR is
Procurement also an area of commercial importance to the United States. FTAA
countries have been implementing relatively new multilateral and bilateral
IPR commitments, and the United States is seeking to expand these in the
FTAA. Finally, no FTAA countries besides the United States and Canada are
party to the WTO Government Procurement Agreement. FTAA

negotiations in this area present an opportunity to provide new commitments
that would guarantee the opportunity for U. S. merchandise and services
supplies to compete for contracts in regional procurement markets.

FTAA May Expand Access U. S. service providers stand to gain from
liberalization in the FTAA as for U. S. Service Providers

existing trade barriers are lowered in the region. The service sector is a
and Secure Recent

commercially important area for the United States. World services exports
Liberalization

were $1.3 trillion in 1998, and the United States was the largest exporter,
accounting for nearly 20 percent of services exports. By comparison, Canada,
the next largest FTAA exporter, accounted for just 2.5 percent.
Domestically, services account for 78 percent of the U. S. gross domestic
product and a growing share (21 percent) of U. S. exports. Many FTAA
countries? service sectors, such as telecommunications and energy, have
traditionally been highly regulated and controlled by monopoly or state
enterprises. However, as part of their larger reform process, many FTAA
countries have begun privatizing state enterprises and opening some

sectors to increased international competition. 13 For example, Brazil,
Argentina, Chile, and Venezuela recently have begun privatizing segments of
their telecommunications sector, and Argentina opened its domestic

13 Some U. S. civil society groups have raised concerns that the FTAA would
lead some countries to also privatize state- provided social services, such
as health and education. See chapter 3 for more information on this topic.

telecommunications market to full competition in 2000. Countries have
initiated these reforms partly because service sectors provide resources for
other elements of the economy and can be important engines for economic
development.

However, the reforms are relatively new and countries have made only limited
multilateral commitments in the WTO. For example, the number of commitments
most FTAA countries (except for Canada, Argentina, and the United States)
made in the WTO services agreement was ranked in a recent OAS study as
moderately low to very low. Additional multilateral agreements on basic
telecommunications and financial services have since

been concluded and enjoyed greater participation. 14 Also, U. S. service
providers may receive less favorable treatment and access than other
competitors. FTAA countries have engaged in numerous subregional trade
agreements, many of which include services. These include Mercosur, CARICOM,
the Andean Community, and many Mexican

and Chilean bilateral free trade agreements. As they do for merchandise
trade, such subregional agreements put countries not party to the agreement
at a disadvantage.

14 Of the 34 FTAA countries, 22 made specific commitments under the
Agreement on Basic Telecommunications. In addition, all of the countries
except Brazil committed to adopt in whole or in part the Reference Paper on
Pro- Competitive Regulatory Principles, which is a voluntary accompaniment
that fosters competition in the telecommunications sector by providing
regulatory principles to curb the anticompetitive behavior of
telecommunications providers with monopolistic characteristics.

FTAA Investment Provisions A comprehensive FTAA could provide new
protections for existing and May Help Secure Recent

future U. S. investments. The United States is one of the largest investors
in Reforms and Expand U. S. Latin America, and the stock of U. S. FDI in
FTAA countries accounted for

Investor Rights about a quarter ($ 265 billion) of all U. S. FDI abroad.
Canada was the

largest recipient, followed by Brazil and Mexico. FTAA countries, primarily
Canada, accounted for only about 10 percent of FDI in the United States.
Although FTAA countries have sought to attract more investment in their
economies, the United States has investment treaties protecting the rights
of investors with only a few FTAA countries. An FTAA agreement could

provide stronger protections for U. S. investment in Latin America. Along
with direct investment, capital also is provided to countries through
shortterm portfolio investments such as stocks and bonds. 15 The United
States has proposed that each form of investment be covered under the FTAA

agreement. Investment is a commercially important area to the United States
and one that is increasingly interconnected with trade. About 35 percent of
goods exports and about 19 percent of services exports were related to U. S.
investments abroad from 1990 to 1997. Multinational companies choose between
producing a product in the domestic market and exporting it across the
border, locating in the foreign market and producing the product there, or
producing a product jointly in several countries. When trade

barriers are high, the incentive to locate abroad is increased. Free trade
agreements coupled with investment provisions can enable businesses to make
more efficient investment decisions that are not distorted by

government policies. Also, for some industries, particularly certain service
sectors, local production of the service is preferred due to legal reasons
and because it is more efficient. U. S. service sales through U. S.- owned
foreign affiliates recently exceeded U. S. cross- border sales. Worldwide,

sales by multinational corporations in the 1990s expanded at a much faster
rate than global exports, and their levels of production grew from 5 percent
of gross domestic product in 1982 to 10 percent in 1999, according to the
United Nations. Sales of foreign affiliates worldwide ($ 14 trillion in 1999
and $3 trillion in 1980) are now nearly twice as high as global exports.

15 Foreign investment can be broken into two categories: FDI, in which an
investor gains a certain share of ownership of an asset or company, and
portfolio investment, in which an investor provides capital to an entity but
has limited or no ownership of the borrower. The U. S. government defines
direct investment as ownership of at least 10 percent of voting shares in a
corporation. Other investments are considered portfolio investment. Whether
portfolio investments will be included in the FTAA investment provisions is
subject to negotiation. See chapter 3 for more information on these
negotiations.

Economic reforms in many FTAA countries have recently opened some markets to
increased investment, and the privatization of state- owned firms also has
drawn significant foreign capital from the United States, Europe
(particularly Spain), and elsewhere. Brazil was the largest recipient of new
FDI in Latin America, receiving 41 percent ($ 30 billion) in 2000, with
Mexico second at 18 percent ($ 13 billion). A high percentage of these
investments went toward acquiring assets in the

telecommunications, energy, and finance sectors. FDI in Brazil has been
particularly large because the government privatized state- owned electric
power companies, banks, and retail establishments. Brazil also changed its
constitution to allow foreign investment in petroleum, shipping,
telecommunications, and natural gas sectors and passed patent reform
legislation that increased incentives for direct investment, according to
the U. S. Department of Commerce. FDI in Argentina, Chile, and Venezuela
also

has increased substantially in recent years due to acquisitions of
stateowned service enterprises. Overall, new FDI in Latin America was $74
billion in 2000. For U. S. investors, many of these new investments are not
covered by bilateral or multilateral investment agreements. The United
States has

investment agreements in force with only 10 countries in the FTAA region.
NAFTA provides strong protections for investments in Canada and Mexico, and
the other eight agreements are bilateral investment treaties. 16 Not covered
by any bilateral agreement with the United States are Brazil, which

accounts for $35 billion (13 percent) of the U. S. stock of FDI in FTAA
countries; Chile, which accounts for about $10 billion (4 percent); and
Venezuela, which accounts for $7 billion (3 percent). Multilateral
provisions covering investments are limited. The WTO includes provisions
related to investment in three of its agreements: services, goods, and IPR.

However, there is no broad multilateral agreement that protects investment
specifically. The Organization for Economic Cooperation and Development
began negotiations on such an agreement, but these were suspended over
differences among countries and complaints from civil society groups.

On the other hand, numerous subregional trade agreements and bilateral
investment treaties exist within the FTAA region that do not include the

16 Some U. S. civil society groups have argued that the investor rights
provided by NAFTA give corporations too much ability to challenge domestic
social and environmental regulations. See chapter 3 for more information on
this topic.

United States. Countries have liberalized their investment provisions to
encourage reform and competition and to attract needed capital for economic
development. Currently, all but three countries in the region (the Bahamas,
St. Kitts and Nevis, and Suriname) have signed at least one bilateral
investment treaty with another FTAA country. Many Caribbean countries have
signed bilateral investment treaties with European countries, and Brazil has
one with the EU. Subregional trade agreements

also have included investment provisions, including NAFTA, Mercosur, the
Andean Community, and several of the Mexican and Chilean bilateral free
trade agreements.

United States May Gain As a leader in several areas of technology and
medicine and with large

Additional Intellectual investments in the research and development of new
products and Property Protections

processes, the United States has important commercial interests in Through
the FTAA

promoting the protection and enforcement of IPR abroad. The existing WTO
agreement on IPR provides important disciplines that protect copyrights,
patents, and other intellectual properties. The United States seeks to
expand these provisions in the FTAA to provide greater protections.

Cross- border transfers of royalties and licenses provide one measure of
international sales of intellectual properties. 17 These are fees collected
by those who sell the rights to use industrial processes, techniques,
formulas, and designs; copyrights and trademarks; business format
franchising rights; broadcast rights; and the right to distribute and use
computer

software. In 1999, U. S. exports of these intangible intellectual properties
amounted to $4. 3 billion to FTAA countries, with Canada accounting for 39
percent; Mexico, 18 percent; and Brazil, 12 percent. U. S. imports of
intellectual properties were only $844 million and came primarily from

Canada (72 percent). Software licensing was one of the fastest growing
segments of trade in intangible intellectual properties. In addition to
intangible intellectual properties, the United States also is a large
exporter of numerous products that embody intellectual properties such as
videos,

recordings, software, pharmaceuticals, chemicals, and other physical
products. According to the U. S. International Trade Commission, the
continued growth of U. S. intellectual property exports depends, in part, on
the ability of U. S. trade partners to protect such properties. Also, a
country?s ability to attract foreign investment is partly tied to the
strength of its protections on intellectual properties because companies
want assurance that the intellectual properties they transfer to their new
operations will be protected. Some U. S. industry associations have
identified piracy and lost sales in the region due to IPR problems. 18 For
example, piracy losses for software in Latin America were estimated by the
industry at around $870 million in 2000. At 58 percent, Latin America had

the second highest piracy rate of all world regions, behind Eastern Europe.
19 Also, the pharmaceutical industry attributes lost sales ranging from $66
to $82 million in Argentina and Brazil to inadequate intellectual property
protections.

Although FTAA countries? adoption on laws protecting IPR has improved
significantly over the past decade, problems still exist. For example, the
17 The overall value of IPR to the United States is difficult to quantify
because such an exercise would entail estimating intangible assets,
calculating past expenditures for

research and development, and covering a wide variety of industrial and
service sectors. 18 Estimates of lost intellectual property revenues are
also difficult to construct because they require knowledge of the extent of
piracy and estimates of the potential size of the market if

piracy were eliminated. While difficult to estimate, piracy losses for
certain sectors do exist. 19 Piracy rates were estimated as the share of
pirated software out of total demand for new

software.

United States has initiated WTO dispute settlement procedures against
Argentina and Brazil over limitations in their IPR laws. 20 Also, Paraguay
was designated a priority foreign country under Special 301 provisions of
the Trade Act of 1974 because of its role as a regional center for piracy,
particularly of optical media. Other FTAA countries designated in the USTR
Special 301 report on intellectual property protections included the
Dominican Republic, Guatemala, and Peru.

FTAA May Provide U. S. Government procurement is a relatively important
component of many Suppliers With Market

FTAA countries? economies. FTAA countries? government expenditures Access in
Government comprise 10 to 15 percent of the gross domestic product and can
be higher Procurement Where Few for some smaller economies. The IDB
estimated the size of the Latin

American procurement market in 1996 at between $131 billion and $197
Commitments Exist

billion. Currently, only the United States and Canada are party to the WTO
Government Procurement Agreement. NAFTA also provides some government
procurement access among the United States, Canada, and

Mexico. The United States does not have any multilateral or bilateral
agreements with the remaining FTAA countries. Therefore, the FTAA could
provide significant new access to procurement markets for U. S. exporters of
goods and services. U. S. agricultural and electrical manufacturing and
pharmaceutical companies are among those supporting stronger government
procurement provisions through the FTAA. Also, FTAA governments could
benefit through reduced expenses due to more competitive and inexpensive
products. Some civil society and labor groups argue that the FTAA should
allow for government discretion for social or environmental reasons when
making procurement decisions, and some

U. S. companies favor maintaining programs that provide preferences for
domestic suppliers. Since most FTAA countries have not yet made bilateral or
multilateral commitments in this area, the degree to which they will grant
access to their procurement markets in an FTAA is unclear. 20 The USTR
recently announced that the dispute with Brazil would be negotiated through
a newly created bilateral mechanism.

Appendi xes U. S. Trade and Investment With Countries in

Appendi x I

the Western Hemisphere U. S. trade and investment with Free Trade Area of
the Americas (FTAA) countries has expanded rapidly over the past decade.
Although comprising a relatively small share of the total, U. S. merchandise
trade (exports plus imports) with non- North American Free Trade Agreement
(NAFTA) FTAA countries more than doubled in the past decade. Machinery and

transportation equipment was the largest merchandise trade category,
followed by chemicals and plastics. Clothing, vegetable products, and
minerals (including petroleum) were also important categories for some
regional groups. U. S. cross- border trade in services (exports plus
imports) is dominated by travel services, but non- NAFTA FTAA countries are
important markets for a wide variety of private services, particularly

insurance. Overall, U. S. investment in FTAA countries was $660 billion in
1999. U. S. foreign direct investment (FDI) accounted for 40 percent of this
total, while portfolio investments in stocks and bonds accounted for 60
percent.

U. S. Trade and Over the past decade, U. S. trade and investment in the
Western Hemisphere

Investment With FTAA grew considerably, increasing both in value and as a
share of overall U. S. trade and investment. U. S. merchandise trade with
FTAA countries Countries Grew

increased over 160 percent from 1990 to 2000 ($ 282 billion to $743
billion). Rapidly

Services trade increased nearly 60 percent from 1992 to 1999 ($ 71 billion
to $112 billion), and the stock of U. S. FDI in FTAA countries increased 123
percent from 1990 to 1999 ($ 119 billion to $265 billion). Through NAFTA
(1994), the United States substantially increased its integration with
Canada and Mexico, its two largest trading partners. NAFTA trade accounted
for 32 percent of total U. S. merchandise trade in 2000, 14 percent of
services trade in 1999, and 13 percent of U. S. FDI abroad in 1999. Trade
with Mexico grew rapidly, accounting for 12 percent ($ 235 billion) of U. S.
merchandise trade in 2000, up from just 7 percent ($ 57 billion) in 1990.

Compared with NAFTA, overall trade with the rest of the FTAA countries is
relatively small. Trade with NAFTA partners Canada and Mexico accounted for
84 percent of U. S. merchandise trade with all FTAA countries (see fig. 11),
as well as over 50 percent of U. S. services trade and U. S. FDI with FTAA
countries.

Figure 11: Share of U. S. Merchandise Trade With FTAA Regional Groups, 2000

NAFTA Andean Community

84% 5% 5%

Mercosur

3%

CACM

2% Other

1% CARICOM Note: Merchandise trade is exports plus imports of industrial and
agricultural goods. Source: GAO analysis of U. S. Department of Commerce
data.

However, non- NAFTA FTAA countries? shares rose in services and investment.
Figure 12 illustrates increases in U. S. trade and investment with non-
NAFTA FTAA countries over the last decade. U. S. services trade

with non- NAFTA FTAA countries increased from 10 to 13 percent of the total
U. S. services trade, doubling from 1990 to 1999 ($ 27 billion to $54
billion). U. S. FDI in non- NAFTA FTAA countries nearly tripled ($ 40
billion to $119 billion), rising from 9 to 11 percent. In terms of
merchandise trade, non- NAFTA FTAA countries maintained about a 6- percent
share of growing U. S. trade from 1990 to 2000 ($ 56 billion to $123
billion).

Figure 12: U. S. Foreign Direct Investment, Merchandise Trade, and Services
Trade With Non- NAFTA FTAA Countries, 1990- 2000

Dollars in billions

140 120 100

80 60 40 20

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Goods FDI Services Note 1: Data were not available for trade in services and
FDI in 2000. Note 2: Values are in current (not constant) U. S. dollars.
Note 3: Goods and services trade are exports plus imports. FDI is U. S.
direct investment in nonNAFTA FTAA countries.

Source: GAO analysis of U. S. Department of Commerce data.

U. S. -FTAA One- half of U. S. exports to FTAA countries were machinery and
Merchandise Trade transportation equipment (see fig. 13). These included
products such as computer equipment, airplane engines, and motor vehicle
parts. Chemicals Was Dominated by

and plastics comprised the next largest export category at 14 percent.
Machinery and Table 7 shows the top three categories of exports and imports
for each

Transport Equipment; regional group. There is some variation in the
importance of certain

products among regional groups. For example, clothing rather than
Agriculture Was a machinery and transport equipment was the largest U. S.
export to Central Relatively Small

America, partly because clothing producers in these countries use some U.
S.- produced inputs to make clothing destined for the U. S. market. Share

Figure 13: Share of U. S. Exports to FTAA Countries, by Sector, 2000

Machinery and transport Remaining sectors

50% 16% 14%

Chemicals and plastics

7% 6%

Base metals

3% 4% Other manufactures

Wood and paper products Minerals Source: GAO analysis of U. S. Department of
Commerce data.

Table 7: Top U. S. Export and Import Sectors by Regional Group, 2000 Share

Share Regional group Top three export sectors (percent) Top three import
sectors (percent)

Andean Community Machinery and transport 47

Minerals 71 Chemicals and plastics

20 Vegetable products

6 Vegetable products

6 Base metals

5 CACM Clothing

30 Clothing

57 Machinery and transport

22 Vegetable products

15 Chemicals and plastics

11 Machinery and transport

12 CARICOM Machinery and transport

33 Minerals

36 Chemicals and plastics

11 Chemicals and plastics

25 Miscellaneous

10 Clothing

15 Mercosur Machinery and transport

55 Machinery and transport

26 Chemicals and plastics 23

Base metals 12 Other manufactures

8 Minerals

12 NAFTA Machinery and transport

52 Machinery and transport

49 Chemicals and plastics

14 Minerals

12 Base metals

8 Wood and paper

7 Other Machinery and transport

39 Clothing

30 Clothing

13 Vegetable products

11 Chemicals and plastics

12 Base metals

10 Source: GAO analysis of U. S. Department of Commerce data.

Like exports, U. S. imports from FTAA countries were dominated by machinery
and transportation equipment (see fig. 14). However, minerals (especially
petroleum) were the second largest import category, comprising 16 percent of
the total. Wood and paper products were also important, comprising 6 percent
of U. S. FTAA imports along with chemicals and plastics. There was greater
diversity in U. S. imports from various regional groups compared with U. S.
exports. For example, clothing was the one of the largest import categories
for Central American

and Caribbean countries and vegetable products were important imports from
the Andean Community, Chile, and Central America. However, U. S. imports
from some FTAA countries were dominated by one type of product group. For
instance, U. S. imports of minerals accounted for 88 percent of all U. S.
imports from Venezuela (56 percent for Ecuador and 51 percent for Colombia).
Similarly, clothing accounted for 88 percent of U. S. imports from Haiti (84
percent for El Salvador and 78 percent for Honduras).

Figure 14: Share of U. S. Imports From FTAA Countries, by Sector, 2000

Machinery and transport Minerals

16% 42%

15%

Remaining sectors

6% 6%

Chemicals and plastics

5% 5% 5%

Wood and paper products Base metals Clothing Miscellaneous goods

Source: GAO analysis of U. S. Department of Commerce data.

Agricultural trade was a relatively small and decreasing portion of overall
trade between the United States and FTAA countries. Although increasing in
value over the decade, agricultural trade with FTAA countries fell from 8
percent in 1990 to 6 percent in 2000 as a share of the total U. S. FTAA
trade. The majority of U. S. agricultural exports were accounted for by
vegetable products (41 percent, $7 billion) and prepared food and beverages
(36 percent, $6. 4 billion). Imports were somewhat more diversified with 36
percent accounted for by vegetable products ($ 9.7 billion), 33 percent by
prepared food and beverages ($ 8. 8 billion), and 29 percent by animal
products ($ 7.7 billion). Fats and oils made up the remainder of trade,
accounting for a small share of both imports and exports (about 1 to 4
percent). FTAA agricultural trade is an important component of overall U. S.
agricultural trade. About 54 percent of all U. S. agricultural imports came
from the Western Hemisphere, while about 36 percent of U. S. agricultural
exports went to FTAA countries. Agricultural trade with

Mercosur was minimal, accounting for only 1 percent of U. S. agricultural
exports and 8 percent of Mercosur?s world agricultural imports. Travel and
For U. S. services trade with FTAA countries, travel was the largest sector
in Transportation Were

cross- border trade, accounting for nearly half of the total in 1999.
Passenger fares and other transportation services combined accounted for the
Largest Sectors in 21 percent of U. S. services trade. Other types of
services, such as business, U. S. Cross- Border telecommunications,
insurance, and financial services, each accounted for

Trade in Services small shares of total cross- border transactions,
generally between 2 and 8

percent. This pattern of distribution is relatively similar to the pattern
of overall U. S. services trade with the world. (See fig. 15.)

Figure 15: Share of Service Subsectors in U. S.- FTAA Trade, 1999

Travel Other transportation

11% 47%

Passenger fares

10% 8%

Business, professional, and technical

5%

Financial services

5% 3%

5%

Other private services

4%

Royalties and licensing fees Telecommunications Insurance

2% Education Note: Service trade is exports plus imports of private cross-
border services. Private services exclude government and military services.

Source: GAO analysis of U. S. Department of Commerce data.

Canada was generally the largest U. S. export market for each of the service
subsectors, followed by Mexico and Brazil. Some sectors have experienced
rapid growth. For example, U. S. exports of insurance services to Latin
America increased by 81.3 percent in 1999 to $1.6 billion. 1 These exports
accounted for 71 percent of U. S. world cross- border insurance exports. 2
At the same time, some service subsectors contracted. U. S. exports of
computer and data processing services to South and Central America decreased
by 17. 7 percent in 1999, for a total of $190 million and accounting for 8.3
percent of total U. S. exports of such services. Overall, U. S. services
exports and imports with FTAA countries increased nearly 60

percent from 1992 to 1999. U. S. Investment in

The FTAA region was an important destination for U. S. FDI and purchases
FTAA Countries Nearly of bonds. U. S. FDI in FTAA countries accounted for
about a quarter ($ 265 billion) of all U. S. FDI abroad. International
investment can take the form Evenly Split Between of long- term FDI through
acquisition or new operations and short- term FDI, Stocks, and Bonds

portfolio investments through stocks and bonds. U. S. holdings of FTAA bonds
accounted for 37 percent ($ 206. 2 billion) of U. S. investments in foreign
bonds. However, U. S. holdings of FTAA stocks only accounted for 9

percent ($ 189.8 billion) of U. S. investments in foreign stocks (see fig.
6). FDI was the largest category of U. S. investment in FTAA countries,
accounting for 40 percent of the total. Canada accounts for over 40 percent
of each category. However, Canada?s share of U. S. FDI to FTAA countries

fell from 58 percent in 1990 to 42 percent in 1999, while Brazil and Mexico
both increased their shares to 13 percent each.

In 1999, 43 percent of the stock of U. S. FDI in non- NAFTA countries was in
finance, insurance, and real estate, while 26 percent was in the
manufacturing sector. For the NAFTA countries of Canada and Mexico, the
ratio was nearly reversed with 43 percent of U. S. FDI in the manufacturing
sector and 22 percent in finance, insurance, and real estate. For some
countries, U. S. investment was concentrated in particular subsectors. For
example, Venezuela received a larger share of its U. S. FDI in the petroleum
sector, and Brazil, Argentina and Chile received a larger portion in the

1 Cross- border insurance exports are measured as the net between foreign
premiums paid in minus claims paid out. 2 Due to data limitations, it is not
possible to determine which countries within the region account for the
majority of these exports.

banking sector. The automobile sector has already received large investments
from U. S. automakers, particularly in Mercosur, where trade barriers exist
and investment incentives are offered. General Motors is the second largest
multinational in the region in terms of sales.

FTAA countries are responsible for a relatively small share of overall
investment in the United States. Total FTAA FDI in the United States
accounted for only 10 percent of all FDI in the U. S. market. Canada was the
largest FTAA holder of FDI in the United States, accounting for 8 percent of
overall FDI. Latin American countries combined accounted for between 1 and 3
percent of total foreign investment in U. S. FDI, stocks, and

bonds in 1999.

Appendi x II

GAO Contacts and Staff Acknowledgments GAO Contacts Kim Frankena (202) 512-
8124 Anthony Moran (202) 512- 8645 Acknowledgments In addition to the
persons named above, Tim Wedding, Jody Woods,

Venecia Kenah, Ernie Jackson, and Lynn Cothern made key contributions to
this report.

(320002) Lett er

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GAO United States General Accounting Office

Page i GAO- 01- 1027 FTAA Negotiations

Contents

Contents

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Contents

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Contents

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United States General Accounting Office Washington, D. C. 20548

Page 1 GAO- 01- 1027 FTAA Negotiations

A

September 7, 2001 Lett er

The Honorable Charles Grassley Ranking Minority Member Committee on Finance
United States Senate

Dear Senator Grassley: This report responds to your request that we review
the negotiations toward a Free Trade Area of the Americas (FTAA) agreement.
Specifically, it addresses (1) the progress made to date and the issues that
remain on topics relating to negotiating greater market opening among FTAA
countries, (2) the progress made and the issues that remain in developing
other rules and institutional provisions for an

eventual FTAA agreement, (3) the significant crosscutting themes affecting
the FTAA negotiations and how have they been addressed to date, and (4) the
potential effects of a completed FTAA on U. S. trade and investment with
other Western Hemisphere countries.

As agreed, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 15 days after its issue date. At
that time, we will send copies of this report to the U. S. Trade
Representative, the Secretary of State, the Secretary of Agriculture, the
Secretary of Commerce, and interested congressional committees. Copies will
be made available to others upon request.

If you or your staff have any questions about this report, please contact me
on (202) 512- 4128. Other GAO contacts and staff acknowledgments are listed
in appendix II. Sincerely yours,

Loren Yager Director, International Affairs and Trade

Page 2 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 3 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 4 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 5 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 6 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 7 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 8 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 9 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 10 GAO- 01- 1027 FTAA Negotiations

Executive Summary Page 11 GAO- 01- 1027 FTAA Negotiations

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Chapter 1

Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 2

Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 2 FTAA Efforts to Open Hemispheric Markets

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Chapter 3

Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 3 ?Other Rules and Institutional Provisions

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Chapter 4

Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 4 FTAA Efforts to Address Crosscutting Themes

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Chapter 5

Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Chapter 5 FTAA Would Secure and Expand Trade Access and Rights for the
United States

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Appendix I

Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix I U. S. Trade and Investment With Countries in the Western
Hemisphere

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Appendix II

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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