[Senate Hearing 110-1203]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1203
IS ``FREE TRADE'' WORKING?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 18, 2007
__________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
------
SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM
BYRON L. DORGAN, North Dakota, JIM DeMINT, South Carolina,
Chairman Ranking
JOHN D. ROCKEFELLER IV, West JOHN McCAIN, Arizona
Virginia OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts GORDON H. SMITH, Oregon
BARBARA BOXER, California JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas
CLAIRE McCASKILL, Missouri
C O N T E N T S
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Page
Hearing held on April 18, 2007................................... 1
Statement of Senator Cantwell.................................... 3
Statement of Senator DeMint...................................... 4
Statement of Senator Dorgan...................................... 1
Witnesses
Brown, Hon. Sherrod, U.S. Senator from Ohio...................... 3
Gresser, Edward, Director, Trade and Global Markets Project,
Progressive Policy Institute................................... 40
Prepared statement........................................... 43
Hindery, Jr., Leo, Managing Director, InterMedia Partners........ 6
Prepared statement........................................... 9
Johnston, John, Partner, Modern Metal Cutting, LLC............... 27
Prepared statement........................................... 29
Wallach, Lori, Director, Global Trade Watch Division, Public
Citizen,....................................................... 12
Prepared statement........................................... 15
Wenk, Christopher, Senior Director, International Policy, U.S.
Chamber of Commerce............................................ 33
Prepared statement........................................... 35
Appendix
Response to written questions submitted by Hon. Maria Cantwell to
Leo Hindery, Jr................................................ 67
IS ``FREE TRADE'' WORKING?
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WEDNESDAY, APRIL 18, 2007
U.S. Senate,
Subcommittee on Interstate Commerce, Trade, and
Tourism,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met at 10:23 a.m., in room SR-253, Russell
Senate Office Building, Hon. Byron L. Dorgan, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. We will call the hearing to order. This is
a hearing of the Commerce Committee, the Interstate Commerce,
Trade, and Tourism Subcommittee. We regret the delay. We've
been voting in the Senate and have just completed our second
vote. I believe Senator DeMint will be along shortly and some
other colleagues as well. But we apologize for the delay.
We thank the witnesses for being here. I'd like to make a
very brief statement about the reason we are holding this
hearing. The title of the hearing is, ``Is `Free Trade'
Working?'' We will be confronting some trade decisions in the
coming months. The President has requested that we extend
``Fast Track,'' which has been renamed Trade Promotion
Authority. In the normal scheme of things in this town, when
one title doesn't work very well, you normally re-title it and
so what is the old Fast Track has now become Trade Promotion
Authority.
It is still the same straightjacket that is requested of
Congress that trade agreements be entered into, negotiated in
most cases, outside of public view and then brought back to the
Congress, and the Congress will have agreed to put itself in a
straightjacket and not be able to offer any amendments, and it
would be considered under expedited considerations, expedited
procedures--that is, Trade Promotion Authority.
The President will request we extend that. There are a
number of trade agreements that have been negotiated and are
ready for consideration by the United States Congress. I noted
earlier this month that the trade agreement with South Korea
was, according to one publication, completed just under the
deadline, whatever the deadline was, as soft or hard as the
deadline might have been for completion of that to be
considered under the current Trade Promotion Authority.
The term, ``free trade,'' has been branded in recent years.
In fact, books have been written about it. The most recent
significant book perhaps, which was a ``truanting book for free
trade,'' was that the world is flat. The world of course, is
not flat and trade is not free.
But the issue of whether the free trade policies are
working is an important issue because we operate under so-
called free trade policies. We've negotiated free trade
agreements, a number of them in recent years. As we have
watched these free trade agreements be implemented, we have
seen a dramatic increase in our trade deficit. Our trade
deficit has exploded to about $830 billion a year for our
merchandise trade deficit last year, the highest in human
history. It, in my judgment, ought to suggest that there is
something wrong with our trade strategy.
I know that those in this room who are interested in trade
have studied David Ricardo and his theory of comparative
advantage. The doctrine of comparative advantage is one that
suggests that there are natural reasons you would want to do
that which is most efficient for you. The typical story is to
describe the Portugal and England circumstance of raising sheep
and shearing them for wool and raising grapes and crushing them
for wine, and exchanging then wool for wine because each state
does the other more efficiently.
However, today's free trade agreements and particularly the
large deficits that have accrued from these free trade
agreements have nothing at all to do with the doctrine of
comparative advantage. We have seen substantial American jobs
depart this country. In fact, we have a pernicious tax break
that says if you leave the country, if you shut your plant,
fire your workers, get out of here, move it to China or India
or Sri Lanka or Bangladesh, we'll actually give you a tax
break.
So we've seen the flight of American jobs, particularly in
the manufacturing industry but also in some other industries as
well and in addition to that, we have people who now estimate
there are 40 to 50 million outsource-able American jobs. Not
all of them, of course, will be outsourced but even those that
remain will be under pressure, downward pressure, with respect
to wages and benefits.
The description the other day of Circuit City deciding to
lay off 3,400 workers, not because they weren't good workers
but because they wanted to hire less expensive workers, is, I
think, a description of that, the downward pressure on wages in
this country as a result of how some describe ``free trade,''
in the global economy.
Let me be clear. I support trade, believe in trade and
believe we ought to be engaged in plenty of trade. I insist it
be fair trade. I believe that so-called free trade is not
working and I'm going to be asking questions about that today.
I know members of this panel will have different views of it
but I think that whatever one's view, I would expect most of us
would believe that the issue of trade is very, very important.
It is, in fact, a global economy. I couldn't change it if I
wanted to. The question is not that. The question is, what are
the rules for trade in the global economy and are the rules for
trade rules that are beneficial to this country's long-term
economic viability? I submit the answer under current
circumstances would be no and change is necessary.
Let me call on my colleagues for any brief opening
statements that they wish to make. Senator Cantwell?
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman and thanks for
holding this important hearing and I thank the witnesses for
being here to testify. Given that we just had a vote scheduled
and considering the time of this hearing and an obligation that
I also have in another committee, I'm going to submit my
statement for the record, but I want to say that the Washington
State trade experience is a very unique trade experience and
we've had some successes and obviously some challenges.
Certainly I'm going to be working with my colleagues here and
on the Finance Committee on the Trade Adjustment Authority,
making sure that we beef up that area of what the United States
needs to do to be investing in a well-skilled workforce.
But I thank the Chairman for his----
Senator Dorgan. Senator Cantwell, thank you very much.
Senator Brown?
STATEMENT OF HON. SHERROD BROWN,
U.S. SENATOR FROM OHIO
Senator Brown. Mr. Chairman, thank you and although I don't
sit on either this Subcommittee or full Committee, I appreciate
your invitation to join you for a few minutes. I particularly
thank the panel for being here and thank you all for your
leadership on all kinds of trade issues, especially what you've
done for American manufacturing and emphasizing the importance
of that.
Some years ago, maybe 5 years ago, Mr. Johnston from Akron,
Ohio, invited me--it was in my Congressional District in those
days, to come and speak to the Akron Machine Shop Operators, a
trade association of--they were an association of some several
dozen manufacturers, machine shop manufacturers in Summit
County. I'll never forget--there were probably 60 or 70 people
at this lunch.
Perhaps the companies ranged from as few as five people to
one that was over 100, I believe, but only one. Most of them
were family owned, most of them non-union, small manufacturers
and a gentleman walked up to me right before the lunch and with
a blue grocery bag, a plastic grocery bag full of flyers,
probably this many--a stack of this many--put them on the table
in front of me and said, I get this many flyers every month
from all over the country, going out of business sales,
cannibalizing their industrial equipment and their inventory or
their production capacity. They were not just Ohio companies,
they were companies everywhere and it really--to me, that
moment really showed the threat to our manufacturing base in
this country and how important it is that we have a trade
policy and a tax policy that works for American businesses,
especially small manufacturers and for workers and for our
communities, and that we have a manufacturing policy as part of
that, whether it's a Manufacturing Extension Partnership or the
other things that we need to do.
A couple of years ago, Mr. Chairman--and you led the
opposition to this, to the Central American Free Trade
Agreement in the Senate--in the House, as many remember, we put
a coalition together of small manufacturers and laborers and
environmentalists and a lot of people representing religious
organizations, both in Central America and in the United States
and people active in agriculture, farmers and it was a
coalition of people really representing--representing America,
people who know that this trade policy is not working.
When I was elected to Congress in 1992, to the House, we
had a trade deficit in the United States of $38 billion, a
trade deficit with China, barely double digits and a trade
surplus with Mexico. Today, that $38 billion trade deficit has
reached, whether you count services, 700, 800-plus billion
dollars and our trade deficit with China has increased about
20-fold since those days. And we obviously have a big trade
deficit with Mexico now and it's clear when you look at the
aggregate trade deficit over these 15 years, it's in excess of
$4 trillion.
In some sense--this isn't the whole story but in some sense
that means $4 trillion of wealth has left our country and we as
a nation need to come up with a real manufacturing policy, a
real trade policy that is going to change directions. I think
the work that Senator Dorgan has done for years in the Senate
and that he is holding hearings with some of the best minds in
trade policy on all sides, I think will be very helpful today.
I apologize, I have a mark-up on Food and Drug
Administration issues in the HELP Committee so I won't be here
for the whole time but I will read all your testimony and
continue the conversation with all of you who have been so
helpful in formulating the real direction we should take in
trade policy in our country. I thank you all for being here.
Senator Dorgan. Senator Brown, thank you very much. The
Ranking Member, Senator DeMint is here. Senator DeMint, thank
you.
STATEMENT OF HON. JIM DeMINT,
U.S. SENATOR FROM SOUTH CAROLINA
Senator DeMint. Thank you, Mr. Chairman. I want to thank
the whole panel for helping us look into this very important
issue for the country and I appreciate Senator Brown's comment
but I think as all of us know, the trade deficit is not a debt
and I think we are many times misleading the American people as
to what a trade deficit is. Those of us who had to work with
balance sheets for many years know that if you spend $100 to
buy an asset that in this country, is worth more than $100, you
have actually increased your wealth.
As we look at our trade deficit, while we may be paying for
many things from all over the world, we are receiving something
very real in return. Many of things that we receive in turn are
raw materials, parts for equipment that are manufactured in
this country and then often, exported all over the world. I
think if we fail to connect the dots on everything that is
happening with trade around the world, we really miss that
point.
Certainly there are many ways that we can improve trade and
we do need to recognize that our whole economy is now
interwoven in the international markets and any talk that we
somehow need to stop that or try to manage it on some kind of
global scale is not realistic and not productive for us here in
Congress.
Over 31 million jobs in this country depend on trade and
it's the fastest growing sector of our economy. I know in South
Carolina, we've become one of the most international states in
the country, buying from all over the world and selling all
over the world. We have the American headquarters for BMW and
Michelin.
Every time we try to do something protectionist related,
such as put a tariff on steel, I hear from manufacturers all
over our state that they can no longer compete in the global
market if it costs them more to buy steel in the United States
than it would if they were producing somewhere else. So there
is an effect sometimes that we don't intend in Congress when
we're trying to protect an industry, when in fact, we make our
country much less competitive.
I hope we can focus some of our comments not just on the
negative aspects of trade because certainly there are ways we
can improve it and we need to discuss it. But one of our
biggest challenges as a nation is we are doing things here in
Washington and particularly in Congress that make it more and
more difficult for our companies to compete globally. So if we
don't sell more overseas to the 95 percent of the world that
lives outside of America, then we will have a trade deficit
with other countries.
When you have the second highest corporate tax rate in the
world, you create a problem for our manufacturers and when you
have one of the most complex and onerous regulatory systems in
the world, it makes us less competitive. And when we have a
litigation system that's the worst in the world, creating more
liability for manufacturers and producers in this country than
any other place in the world, we have to realize, if we're
willing to look, that other countries are starting to get it.
Even Europe, who we look at as being antiquated, continue
to lower their corporate tax rate and more and more American
wealth is staying overseas Senator; Microsoft keeps their money
in Ireland instead of bringing it home for research and
development and jobs because they lowered their corporate tax
rate to around 12 percent or I think below that.
So let's talk about how to make America more competitive,
how to take the cost of government off our manufacturers. Then
I think we'll solve a problem if we feel it is, that we buy
more from other countries than they buy from us.
But I appreciate, Mr. Chairman, you having these hearings
because irrespective of our opinions, we know we can improve
this trade situation. We know we can level the playing field
more for our companies here and expand wealth in this country
so I look forward to hearing from these panelists. Thank you.
Senator Dorgan. Well, Senator DeMint, we are going to have
a lot to talk about, you and I. It will be an interesting
Congress for us to discuss trade. Let me call on the panel and
then we will have this opportunity through questions as well,
to evaluate some of your comments and the comments of other
Members of the Committee.
We have Mr. Leo Hindery who is joining us today and I want
to call on Mr. Hindery first. Leo Hindery is a successful
business executive for many, many years, a NASCAR driver, an
author who has written a book. It takes a CEO that deals a lot
with the issue of trade and Leo Hindery was one of the first
people I thought of when I thought of asking some witnesses to
come to talk about trade and I'm very pleased you have been
willing to travel to Washington, D.C.
Mr. Hindery, we will, for all the witnesses, include your
entire statement as a part of the permanent record and we would
say to all of the witnesses, including yourself, you're welcome
to summarize as you wish. Why don't you proceed?
STATEMENT OF LEO HINDERY, JR., MANAGING DIRECTOR, InterMedia
PARTNERS
Mr. Hindery. Thank you, Mr. Chairman, and Senators, and
thank you for this privilege. Briefly, I am, as the Senator
commented, the Managing Director of InterMedia Partners. I
previously served as the Chief Executive of both TCI and AT&T
Broadband and I had the privilege of chairing recently the
Horizon Project, which was an initiative by a group of 11 chief
executives and policy specialists that attempted to produce a
report to Congress on what we believe needs to be done to
protect America's prosperity in this era of globalization.
My own concerns, Senators, about our trade policies
manifest themselves, Senator Dorgan, in the Nation's record and
still growing trade deficit that you spoke of, in the
disappearance of valuable chunks of our economy due to what I
believe are callous offshoring of American jobs with many, many
millions more to follow and in the adverse national security
implications of certain of our trade practices.
As has been commented, the United States is now the only
major net consumer in the global economy with a current account
deficit in 2006 of $857 billion, a staggering 6\1/2\ percent of
our GDP and I would point out that this huge deficit does not
include an estimated $200 billion of taxable foreign subsidiary
earnings being masked each year by misallocations and
obfuscating accounting.
As has been commented, more than five million American jobs
have been lost to offshoring in just the past 6 years. Three
million are manufacturing but notably, two million are service
and IT related. Looking ahead, a conservative estimate is that
14 million of the roughly 141 million civilian, non-self
employed jobs in the country today will be offshored in the
next 10 years, seven million more manufacturing jobs, 3.3
million more service jobs and 3.4 million more IT jobs. Various
esteemed individuals, including the former Vice Chairman of the
Federal Reserve, Alan Blinder, suggests that my estimates are
very, very conservative.
But in the process of exporting these high tech
manufacturing jobs, the United States is also indirectly
exporting, in my opinion, important aspects of its national
security.
We currently have a $50 billion annual trade deficit with
China alone, for what are called Advanced Technology products
and from a U.S. national security perspective, DRAM, SRAM and
ROM chip manufacturing is now grossly over-reliant on China, on
Taiwan and South Korea. Many of these items are essential,
absolutely essential to our high-tech weaponry and national
defense.
For free trade to be fair trade, Senators, it must, in my
opinion, be rules-based and then these rules must be followed.
But right now, many major U.S. trading partners are breaking
the rules through massive, massive currency, tax and capital
subsidies, and through what I believe are unfair labor and
environmental practices.
For each of the past 22 years, pursuant to what was called
the Trade Act of 1974, the Office of the U.S. Trade
Representative has submitted an annual report to Congress,
surveying the significant trade barriers to U.S. exports.
According to the USTR, there are 10 categories of trade
barriers, ranging from tariffs to bribery.
But I would point out notably that no where in this survey
of foreign barriers to our exports, Senators, is there any
serious treatment of non-ILO labor practices, of nonexistent or
diminished environmental standards, or especially of subsidies
and currency manipulation. If the USTR's report in 2007, which
is called the NTE, which was just delivered to Congress, is
overlooking the most adverse trade barriers, then it should
come as no surprise that we as a nation, in my opinion, are
getting absolutely killed in our trading with China, with India
and Japan.
Let me give, if I might, just two cases in point. The
Semiconductor Industry Association has recently calculated that
the combined tax and capital subsidization of China's high tech
industries is now so extreme that only 10 percent of the
overall cost difference vis-a-vis American manufacturers is
labor-cost based. Ninety percent, Senators, is tax and capital
grants based.
In turn, despite Treasury Secretary Paulson's contention on
February 10th that the Japanese yen's value is set based on
underlying fundamentals, your colleagues, Senators Levin and
Stabenow and Congressmen Dingle and Levin have concluded that
in fact, the government of Japan's artificial depressing of the
yen has now resulted in an effective subsidy to Japanese auto
manufacturers of roughly $8,000 per car.
To personalize further how foreign subsidies and illegal
trade practices are crushing American workers, I would like to
briefly discuss Intel and Citigroup, both of which are leaders
in their respective fields. Intel's announcement on February 12
of its new, programmable teraflop superchip was rightly hailed
as a success for American innovation. But this euphoria turned
into just more pink slips for American high tech workers when a
month and a day later, on March 13, Intel announced that it
will now build in China, a massive, $2\1/2\ billion chip
fabrication shop, propped up by an announced $1 billion subsidy
from the Chinese government and by many other subsidies that
neither Intel nor the Chinese wanted to announce.
Then there is Citigroup, which confirmed last week that at
the same time it is eliminating 7,000 American jobs, even more
notably in my opinion, it is offshoring--offshoring an
additional 9,500 American jobs primarily to India, where it
already has 22,000 employees working in highly skilled areas
like research, investment banking and credit analysis.
The bank announced these relocations and cuts with
absolutely no expressed remorse for the American workers
affected and it certainly did not discuss the extensive
subsidies. Again, the extensive subsidies it is receiving from
the Indian government as inducements for offshoring another
9,500 jobs.
Greatly informing all of my comments today, Senators, is
the reality, as has been pointed out and as Senator Sherrod
Brown mentioned a moment ago, that the U.S. goods trade deficit
with China alone is now a staggering $233 billion. In 2006, we
did export $55 billion of goods to the Chinese but they turned
around and exported $288 billion to us. This ongoing imbalance
in trade with China has left that country, China alone, with
foreign exchange reserves of an unprecedented $1.2 trillion, up
37 percent in just the last year. They are by now the far
largest source of funding for our deficits.
But as I've commented, China's real trade advantage results
not from its criminally low wages but it comes from tax breaks
and from subsidies, including currency manipulations, grants,
low cost loans given to companies that have no intention and
sometimes not even the obligation to pay them back. And to
these benefits, China adds tariffs, it adds standards abuses,
intellectual property theft, policies favoring domestic
production, and market access highly conditioned on local
production or intellectual property transfers.
In recent days, we should take some comfort, but modest
only, that the Executive Branch has finally began to wake up to
some of the specific trade problems with China and to initiate
some long overdue responses.
But as we go forward, this Administration working closely
with this Congress must, in my opinion, take additional steps
to ensure that our trade agreements with all countries, all
countries, are fair and vigorously enforced, that high valued
added jobs in the U.S. grow and that there continue to be
substantial investments in worker skills.
With respect, Senators, I recommend therefore that this
Subcommittee consider four actions. Congress should require
that the annual NTE survey by the USTR include as defined trade
barriers to U.S. exports, subsidies, currency manipulation,
non-ILO labor practices and weak or nonexistent environmental
standards.
You should in turn, charge the USTR with prosecuting all
meaningful illegal violations. And expanding on a proposal made
already by Senator Stabenow, any U.S. company, in my opinion,
should be permitted to petition for tariffs on imports from
countries that materially benefit from these subsidies, keep
their currencies depressed or do not have ILO labor and minimum
environmental standards.
Finally, I could not agree more strongly that there should
be no renewal by this Congress of Fast Track TPA without
requiring that all future trade agreements approved under TPA
incorporate labor and environmental standards.
Trade agreements, as has been commented on, are only as
good as the resources brought to bear to enforce them. Yet we
know sadly that in the last 6 years, the U.S. has filed an
average of only three WTO cases a year versus an average of 11
per year during the Clinton Administration. I believe Congress
should transfer responsibility for evaluating and prosecuting
trade agreement violations from the Office of the USTR to a new
division in Justice, headed by an Assistant Attorney General
for trade enforcement. Congress should also insist on parity
enforcement against and among all trade agreement requirements,
whether commercial or otherwise.
Senators, as already proposed by Senators Dorgan and
Clinton, Congress should, in my opinion, go forward on an
actionable limit, expressed as a percent of GDP, on both our
yearly trade deficit and our accumulated trade debt. When any
such limit is exceeded, the Executive Branch must immediately
initiate actions with Congress to bring the deficit back in
line.
And finally, to stop the criminal export of important
aspects of our national security, Congress should enact
legislation quickly requiring that manufacturing activities
which have national security implications and are proposed to
be offshore be subject first to a national security impact
statement.
In addition to these four issues and recommendations, which
are under the purview of this Subcommittee, I would hope that
the Senate Finance Committee would consider, in a revenue
neutral fashion, correlating the corporate tax rate of the
Nation's larger manufacturing and technology service companies
with the average value added of their U.S. employees. The
corporate tax rate for these companies would be reduced on a
sliding scale, based on their value-added standing relative to
the median of the particular business sector in which they
operate.
Since most of the value that a corporation--any
corporation--adds to its product and services reflects the
wages and benefits it pays its employees, this simple corporate
income tax change would be a significant financial incentive
for a corporation to boost its average wage to non-executive
employees through productivity gains and by investing in their
skills and in capital equipment.
Finally, Senators, I believe that the Congress should
undertake to eliminate tax deferrals on foreign profits. You
should in turn reform the foreign subsidiary tax allocation
rules to prevent corporations from reducing their U.S. taxable
earnings by misallocating expenses such as interest, R&D and
overhead, both of which greatly exacerbate the offshoring of
jobs and the trade deficit.
Only by fully understanding how globalization and current
U.S. trade policies are affecting America's economic well-being
can we craft future policies that will advance the welfare of
all Americans.
Hopefully, Senators, my recommendations will help you in
this task in ways that preserve the principles of a vibrant
middle class, economic growth and mobility, and economic and
social justice. Thank you for this privilege. It means a great
deal.
[The prepared statement of Mr. Hindery follows:]
Prepared Statement of Leo Hindery, Jr., Managing Director,
InterMedia Partners
I am Leo Hindery, Managing Director of InterMedia Partners. I have
previously served as the CEO of TCI and AT&T Broadband. Recently, I
chaired The Horizon Project, a group of eleven CEOs and policy
specialists that produced a report to Congress on what we believe needs
to be done to protect America's prosperity in this era of
globalization.
Thank you, Mr. Chairman, and Senators, for convening this important
hearing on current U.S. trade policies. My own concerns about these
policies manifest themselves in the Nation's record--and still
growing--trade deficit, in the disappearance of valuable chunks of our
economy due to the callous offshoring of millions of American jobs with
many millions more certain to follow, and in the adverse national
security implications of certain of our trade practices.
The United States is now the only major net consumer in the global
economy, with a current account deficit in 2006 of $857 billon, which
is a staggering 6.5 percent of GDP. And this huge deficit does not
include the estimated $200 billion of taxable foreign subsidiary
earnings being masked each year by misallocations and obfuscating
accounting.
More than five million American jobs have been lost to offshoring
in just the past 6 years: three million manufacturing, and two million
service and IT-related. Looking ahead, more than 14 million of the
roughly 141 million civilian non-self employed jobs in America today
will be offshored over the next 10 years, including 7.0 million more
manufacturing jobs, 3.3 million more service jobs and 3.4 million more
IT jobs. And these are very conservative estimates according to Alan
Blinder, Vice Chairman of the Federal Reserve during the Clinton
Administration.
And in the process of exporting high-tech manufacturing jobs, the
U.S. is also indirectly exporting important aspects of its national
security. The United States has a $50 billion annual trade deficit with
China alone for ``Advanced Technology Products'', and from a U.S.
national security perspective DRAM, SRAM and ROM chip manufacturing is
now grossly over-reliant on China, Taiwan and South Korea. Many of
these items are essential to our high-tech weaponry and national
defense.
For free trade to be fair trade, Senators, it must be rules-based,
and these rules must be followed. But right now many major U.S. trading
partners are breaking the rules through massive currency, tax and
capital subsidies and through unfair labor and environmental practices.
For each of the past 22 years, pursuant to the Trade Act of 1974,
the Office of the U.S. Trade Representative has submitted an annual
report to Congress surveying significant trade barriers to U.S.
exports. According to the USTR, there are ten categories of trade
barriers ranging from tariffs to bribery.
But nowhere in this survey of foreign barriers to U.S. exports,
Senators, is there any serious treatment of non-ILO labor practices, of
nonexistent or de minimis environmental standards, or, especially, of
subsidies and currency manipulation.
If the USTR'S report in 2007, which is called the NTE, is
overlooking the most adverse trade barriers, then it should come as no
surprise that we as a nation are getting absolutely killed in our
trading with China, India and Japan.
Two cases in point:
The Semiconductor Industry Association has recently calculated that
the combined tax and capital subsidization of China's high-tech
industries is now so extreme that only about 10 percent of the overall
cost difference vis-a-vis American manufacturers is labor cost-based
and that 90 percent is tax and capital grants-based.
In turn, despite Treasury Secretary Paulson's contention on
February 10 that ``the Japanese yen's value is set . . . based on
underlying fundamentals'', Senators Levin and Stabenow and Congressmen
Dingell and Levin have concluded that in fact the Japanese government
is artificially depressing the yen to such a degree that Japanese
automakers are realizing an effective subsidy of roughly $8,000 per
car.
To personalize further how foreign subsidies and illegal trade
practices are crushing American workers, I would like to briefly
discuss Intel and Citigroup, each of which is a leader in its
respective field.
Intel's announcement on February 12 of its new programmable
teraflop superchip was rightly hailed as a success for American
innovation. But this euphoria turned into just more pink slips for
American high-tech manufacturing workers when a month and a day later,
on March 13, Intel announced that it will now build in China a massive
$2.5 billion chip fabrication shop, propped up by an announced $1
billion subsidy from the Chinese government and by many other subsidies
that Intel and China did not want to announce.
And then there is Citigroup, which confirmed last week that at the
same time it is eliminating 7,000 American jobs, it is, even more
notably in my opinion, offshoring an additional 9,500 American jobs
primarily to India, where it already has 22,000 employees working in
highly skilled areas like research, investment banking and credit
analysis. The bank announced these relocations and cuts with absolutely
no expressed remorse for the American workers affected, and it
certainly did not discuss the extensive subsidies it is receiving from
the Indian government as inducements for offshoring another 10,000
jobs.
Greatly informing all of my comments today is the reality that the
U.S. goods trade deficit with China alone is now a staggering $232.5
billion. In 2006 we exported $55.2 billion of goods to the Chinese, but
they in turn exported $287.8 billion of goods to us. This ongoing
imbalance in trade with China has left that country with foreign
exchange reserves of an unprecedented $1.2 trillion, up 37 percent just
since this time last year. China is now, by far, the largest source of
funding for U.S. Government deficits.
As I have commented, China's real trade advantage results not from
its criminally low wages, but from tax breaks and from subsidies,
including currency manipulation, grants and low-cost loans given to
companies that have no intention and sometimes not even an obligation
to pay them back. And to these benefits China adds tariffs, standards
abuses, intellectual property thefts, policies favoring domestic
production, and market access conditioned on local production or
intellectual property transfers.
In recent days, the Executive Branch has, finally, begun to wake up
to some of the specific trade problems with China and to initiate some
long overdue responses. But as we go forward, the Adminsitration,
working closely with Congress, must take additional steps to ensure
that our trade agreements with all countries are fair and vigorously
enforced, that high value-added jobs in the U.S. grow, and that there
continue to be substantial investments in worker skills.
To these ends, I recommend that this Subcommittee consider four
actions:
1. Take actions against illegal and unfair trade practices.
Congress should require that the annual NTE survey by the USTR
include, as defined trade barriers to U.S. exports: subsidies;
currency manipulation; non-ILO labor practices; and weak or
nonexistent environmental standards. In turn, the USTR should
be specifically charged with prosecuting all meaningful illegal
violations, and, expanding on a proposal already made by
Senator Stabenow, any U.S. company should be permitted to
petition for tariffs on imports from countries that materially
benefit from such subsidies, keep their currencies depressed,
or do not have ILO labor and minimum environmental standards.
Finally, there should be no renewal by Congress of fast-track
Trade Promotion Authority, or TPA, without requiring that all
future trade agreements approved under TPA incorporate such
labor and environmental standards.
2. Strengthen trade agreements enforcement. Trade agreements
are only as good as the resources brought to bear to enforce
them, but in the last 6 years the U.S. has filed an average of
only three WTO cases a year, versus an average of eleven per
year during the Clinton administration. In response, Congress
should transfer responsibility for evaluating and prosecuting
trade agreements violations from the office of the USTR to a
new Division at Justice headed by an Assistant Attorney General
for Trade Enforcement. Congress should also insist on ``parity
of enforcement'' among all trade agreement requirements,
whether commercial or otherwise.
3. Cap on the Nation's trade deficit. As already proposed by
Senators Clinton and Dorgan, Congress should enact limits,
expressed as percents of GDP, on both the yearly trade deficit
and the accumulated trade debt. When any such limit is
exceeded, the Executive Branch must then immediately initiate
actions to bring the deficit back in line.
4. National security protection legislation. To stop the export
of important aspects of our national security, Congress should
enact legislation requiring that manufacturing activities which
have national security implications and are proposed to be off-
shored by subject first to a ``national security impact
statement''.
In addition to these four trade-related recommendations which are
under the purview of this Subcommittee, I recommend that the Senate
Finance Committee consider, in a revenue neutral fashion, correlating
the corporate tax rate on the profits of the Nation's larger
manufacturing and technology services companies with the average value-
added of their U.S. employees. The corporate tax rate for these
companies would be reduced on a sliding scale based on their value-
added standing relative to the median of the particular business sector
in which they operate.
Since most of the value that such a corporation adds to its
products and services reflects the wages and benefits it pays its
employees, this corporate income tax change would be a significant
financial incentive for a corporation to boost its average wage to non-
executive employees through productivity gains and by investing in
worker skills and capital equipment.
As a final recommendation, Congress should also undertake to
eliminate tax deferrals on foreign profits, and to reform foreign
subsidiary tax allocation rules to prevent corporations from reducing
their U.S. taxable earnings by misallocating expenses such as interest,
R&D and overhead, both of which greatly exacerbate the offshoring of
jobs and the trade deficit.
* * * * * * *
How well the Executive Branch and Congress respond to the
significant challenges confronting the American economy will
substantially determine whether our Nation continues to be the
preeminent economic power in the world, or whether it will experience
declining political influence and economic leadership. Only by fully
understanding how globalization and current U.S. trade policies are
affecting America's economic well-being can we craft future policies
that will advance the welfare of all Americans. Hopefully, Senators, my
recommendations will help you in this task, in ways that preserve the
principles of a vibrant middle class, economic growth and mobility,
innovation, and economic and social justice.
Thank you for this opportunity.
Senator Dorgan. Mr. Hindery, thank you very much for being
here and thank you for your statement. Next, we'll hear from
Lori Wallach, the Director of Public Citizen's Global Trade
Watch, a nonprofit organization to promote government and
corporate accountability in the globalization and trade arena.
Ms. Wallach is a lawyer, has written a number of books and
articles on trade, including Who's Trade Organization, a
comprehensive guide to the WTO. Ms. Wallach, you may proceed.
STATEMENT OF LORI WALLACH, DIRECTOR, GLOBAL TRADE WATCH
DIVISION, PUBLIC CITIZEN
Ms. Wallach. Thank you, Mr. Chairman, and members of the
Committee. Public Citizen has spent 15 years documenting the
outcomes of our current trade regime and I appreciate the
opportunity to share some of our findings.
In considering where we are now, it's important to focus on
the fact that we have now one model of trade and its delivery
mechanisms--agreements like NAFTA and WTO. There is nothing
inevitable about these rules or these outcomes, nor is this
free trade. It is one system of managed trade and this model is
an enormous break from the past, for instance, of GATT.
Now, 15 years later, the data is in. This experiment failed
even the most modest do no further harm test and as the data
provided and my full testimony shows, we desperately need new
rules to set up our trade and globalization regime.
The American public has lived this experience so it's not
surprising that over the last 5 years, public opinion about the
outcomes of this system has shifted dramatically. As the
University of Maryland has tracked in a stage poll over the
last 7 years, those Americans who think our current system is a
net loss for them and for the country is now up to all four of
the five quintiles, up to $120,000 in income and this shift in
opinion, based on the lived experience of the current system's
failure was demonstrated in our election, where scores of
Members of Congress, who voted for the current system were
defeated by those running, calling for change.
I'm going to summarize my findings briefly but I have 13
pages of testimony with several hundred footnotes to the
government sources and there are full reports on many of these
findings that can be found on our website, which is
TradeWatch.org.
First, the U.S. economic outcomes. This model has failed
the U.S. national economy and the majority of its
participants--workers, firms and farmers. First the trade
deficit. Leo Hindery has reviewed the numbers but to put it in
context, before Fast Track was established, first in 1974 and
the series of agreements it enabled, the U.S. had balanced
trade and rising living standards. In fact, in nearly every
year after World War II until Fast Track was passed, we had a
trade surplus. In every year since Fast Track and the
agreements such as NAFTA and its clones and WTO enabled by Fast
Track, we've had a trade deficit but for one year.
The size of the deficit we have now is not only horrifying
but it is widely considered unsustainable, exposing our country
and the global economy to shock and crisis. Now, this is not
inevitable. This is a result of bad policy and one can
demonstrate this by digging into the actual trade flows.
As Senator Brown mentioned, as we have had free trade
agreements with different countries, we've shifted from
surpluses in trade with these countries to deficits
systematically. We now have a deficit with all of our important
free trade agreement partners and with the group as a whole.
And in fact, ironically, U.S. export growth to those countries
with whom we have free trade agreements is less than to the
non-free trade agreement countries. U.S. exports to our free
trade agreement partners is a 22 percent growth. To our non-FTA
partners, it is 25 percent.
So we have agreements, specific agreements with specific
outcomes that are causing these problems and alarmingly, under
the WTO and NAFTA, the U.S. is poised to become a net food
importer. We now import and export the same commodities. Under
WTO rules, we are required to import minimally 5 percent of
every commodity line, even if we're exporting them. We now are
a net importer of most of the products we eat. We export things
that animals eat.
Now what has been the effect on jobs and wages for American
workers? Trade theory says that the total number of jobs is not
affected by trade policy but rather the quality, the type and
the wages for those jobs. These trade agreements explicitly
have investment rules that incentivize companies to relocate.
You get preferential treatment, better than U.S. law, if you
relocate, which is why we saw companies leaving under NAFTA to
Canada, where wages were higher.
This is resulting in a labor arbitrage where there is no
floor. In fact, Department of Labor studies have documented
that since NAFTA and WTO, there has been a 60 percent increase
in threats to bust unions by relocating jobs, and relocation
has doubled after successful union organizing.
What's the result? U.S. worker productivity doubled during
the Fast Track era. The average U.S. worker's annual wages have
increased a nickel--.28 percent, one-quarter of one percent
raise, double in productivity and that kind of a raise.
How has this happened? We've seen one in six of every U.S.
manufacturing job leave the country. Leo Hindery mentioned what
that's done to our tax base. Does that support our hospitals,
our schools, our essential services? And think of what it has
done to our national security. We can't make the things that
are critical to our infrastructure and security anymore in this
country. We wait for the imports.
But in addition, what's happened to people, real people?
The Department of Labor shows when a worker loses a
manufacturing job and then gets a service job, their average
loss in wages is from $40,000 to $32,000. And this offshoring
of jobs is moving up the skills ladder. Leo Hindery mentions
the Blinder Study, which shows that for 25 to 42 million high
tech jobs, they're extremely susceptible to offshoring. We've
lost one million such high tech and service sector jobs in
engineering, IT, and accounting since 2001, most that pay
better than median wages.
Now, Senator DeMint mentioned the trade theory, which is
that we all benefit when there are more imports because prices
go down and everyone benefits from lower prices versus the
people who are losing income because their job is gone. Those
are a minority so everyone gains on the import side and some
people are hurt on the loss of job side.
But when you actually plug the data now into theory, the
gain in cheaper prices on the import side is now outweighed by
the loss to U.S. workers in wages. Empirically, if you look at
the Department of Labor data, to the fact that we now have, for
workers who make $25,000 a year, a net loss of $3,000 annually.
This accounts for a net loss in wages under this model, for the
70 percent of the American workforce that doesn't have a
college degree. These rules are a net loss for the majority
even accounting for the theory of free trade.
Now, in this period, we've also seen 30,000 farms close,
shuttered. We're becoming a net food importer and we've seen
numerous U.S. farms go under.
Who is winning? We hear a mantra that somehow this is
helping defeat poverty in poor countries. The data show the
opposite. The poor countries who have adopted the same model
have lower growth rates and are increasing in poverty and
hunger. Tomorrow, there will be a letter to Congress delivered
by over 300 major national unions, federations, and civil
society groups from developing countries beseeching Congress
not to provide President Bush more Fast Track to lock in the
Doha Round WTO escalation, which they see as incredibly
threatening and likely to increase poverty in the developing
world.
So the outcomes economically have been a loser for the
U.S., a loser for developing countries and then there is the
loss to democracy.
To conclude, I want to review an issue that's not often
discussed, how these trade agreements are used to undermine
domestic policies. WTO and NAFTA require countries to conform
all their domestic laws to the rules of the agreements and the
agreements have 900 pages of non-trade rules. The U.S. has been
the number one target of WTO challenges. We are the number one
recipient of WTO attacks. The U.S. has lost 86 percent of all
the attacks on our laws.
It's even worse when you take into account the attacks and
their anti-dumping and countervailing duty laws. There have
only been 49 cases total in the WTO. We've been the target of
33 and we lost 31. The array of U.S. laws is astonishing that
have been successfully challenged in the U.S. Tax laws,
gambling bans, environmental laws and then there is NAFTA,
which has similar rules but stronger.
The U.S. now is subject to seven major NAFTA challenges.
There are $28 billion in claims pending. One case is just $300
million and it has cost over $3 million just to successfully
defend one of these cases, the bottom line of this economic and
democracy failure.
Number one, there are short term steps Congress can take to
ameliorate the immediate damage. First, for offshoring of high
tech and service jobs, the U.S. ought to adopt the same
policies that Europe has, which is that laws--areas of the U.S.
economy subject to privacy laws, the offshored work in banking
or health records--there should be a protection to make sure
consumer privacy is not undermined and the work can't go to
countries that don't provide at least minimally the same level
of consumer privacy protection. This is what Europe has in
their system and it's called the Safe Harbor System. As a
result, a lot of work does not get offshored. It stays in the
country.
Number two, as Leo Hindery mentioned, there are a variety
of national security screens that can be put into place as far
as the offshoring of work.
Number three, we should strengthen our Buy American anti-
offshoring rules, which currently, the Procurement Agreement
Rules in trade agreements undermine and I agree with what Leo
Hindery said about tax deferrals.
In the broader sense, the answer is no more of the same.
This policy has taken our country to the edge of a cliff. The
first thing we need to do is hit the emergency brake and then
turn around. Therefore, I agree, no more Fast Track. We need to
replace that mechanism and in the future, we need a new system
for negotiating trade agreements that includes binding rules
about what must and must not be in trade agreements so we set a
new course. Thank you.
[The prepared statement of Ms. Wallach follows:]
Prepared Statement of Lori Wallach, Director, Global Trade Watch
Division, Public Citizen
Mr. Chairman, and Members of the Subcommittee, on behalf of Public
Citizen's 200,000 members, thank you for the opportunity to share our
research on the outcomes of current U.S. trade policy. Public Citizen
is a nonprofit research, lobbying and litigation group based in
Washington, D.C. Founded in 1971, Public Citizen accepts no government
or corporate funds. Public Citizen's Global Trade Watch division
focuses on how the current globalization model and its implementing
mechanisms, including the World Trade Organization (WTO) and the North
American Free Trade Agreement (NAFTA), affect Public Citizen's goals of
promoting democracy, economic and social justice, health and safety,
and a healthy environment.
First, I would like to recognize the leadership of Subcommittee
Chairman, Senator Byron Dorgan, who has tirelessly worked to focus
attention on the failings of our current trade regime and the need for
change. Chairman Dorgan has methodically tracked the outcome of the
current policies and plays a vital role in insisting that if these
results are not acceptable, then the model can and must be changed.
Unfortunately for all of us living with the results, the data
supporting the need for a new direction in trade policy are extremely
compelling. I pray that this hearing helps spur the needed changes.
Since the Fast Track system devised by President Nixon was passed in
1974, the agreements it enabled have undermined the interests of most
American workers, firms and farmers. Economic damage has been but one
outcome. The principle and practice of democracy also has been a
casualty. This testimony first focuses on economic outcomes and then
describes domestic policies that have been undermined via trade pacts.
This is avoidable damage. A bad process--Fast Track--has enabled
bad policy, which in turn has had terrible results. There is nothing
inevitable about the negative outcomes my testimony describes. A new
policy can achieve better results. Minimally, we must avoid expanding
the current failed policy, for instance via a Doha Round WTO escalation
or via more NAFTA-model ``free trade agreements'' (FTAs).
The summary of the damage thus far? Before Fast Track we had
balanced trade and rising living standards; since then the U.S.
trade deficit has exploded as imports surged, and now we have a
deficit equal to 6 percent of our GDP. A deficit of this
magnitude is widely agreed to be unsustainable, exposing the
U.S. and global economy to risk of crisis, shock and
instability. The average American worker is only making a
nickel more per hour in inflation-adjusted terms than in 1973,
despite impressive productivity gains, while income inequality
has jumped to levels not seen since the Robber Baron era.
During the NAFTA-WTO era, we have lost three million U.S.
manufacturing jobs, one of every six in that sector,
devastating local tax bases on which our schools and hospital
rely and undermining our ability to produce the basic goods
essential for our national security and infrastructure. And
now, we are even becoming a net food importer!
How have we gotten into this mess? The U.S. Constitution gives
Congress exclusive authority to ``regulate commerce with foreign
nations'' (Article I-8.) The Federalist Papers discuss why this
structure--and the inherent checks and balances it established--was
vital based on the experience of living under a regime where trade
policy was determined by the executive--the king in the case of the
American colonies. The goal was to ensure that U.S. trade policy was
set by the branch of government closest to the people so as to preclude
the ability of the President to favor friends of allied foreign
governments rather than considering the national interest. Fast Track
delegates away to the Executive Branch Congress' constitutional
authority to control the contents of U.S. trade agreements, as well as
numerous other important powers. Happily, another Boston Tea Party or a
revolution are not needed to rectify the concentration of trade
authority in the hands of the executive, as it is within the power of
Congress to do so.
We need a new mechanism for negotiating trade agreements that puts
a steering wheel--and when necessary, brakes--on our trade negotiators
so that Congress and the public are back in the driver's seat. Only by
replacing the unbalanced, outdated Fast Track trade authority
delegation system can we chart a new course on trade that can harness
trade's benefits for the majority.
For those members of the Commerce Committee not in office in 1993
when NAFTA was considered, I respectfully urge you to review the floor
debate during which the Commerce Committee's Vice Chair, Senator Ted
Stevens, wisely inquired whether the limits imposed by Fast Track on
the Senate are even permissible under the Constitution. Senator Stevens
noted that an Article I-7 clause 1 \1\ provides the Senate a right to
amend revenue measures. Trade agreements, by merit of their setting
tariff levels, are revenue measures. Fast Track eliminates the Senate's
constitutional right to amend. This is a point worth consider in
thinking about what system should replace the Fast Track delegation
mechanism. The conclusion of this testimony addresses this issue in
more detail.
Fast Track must be replaced. Fast Track enabled trade agreements
are devastating the U.S. middle class while increasing poverty and
instability overseas. The following data summarizes the outcomes of our
current policy. This is not speculation about what could occur or
projections based on various assumptions. Following are the actual
outcomes, replete with footnotes and details thanks to Global Trade
Watch's research director, Todd Tucker.
1. The Results of Current U.S. Trade Policy: Wages Stagnate as Trade
Deficits Soar, Displacing Good U.S. Jobs
The average American worker is only making a nickel more per hour
in inflation-adjusted terms than in 1973, the year before Fast Track
was first passed. In 1973, the average American worker made $16.06
hourly in today's dollars. That same worker only makes $16.11 today,
despite U.S. workers' average productivity nearly doubling since 1973.
Better trade policy can do better for America's workers than this
pathetic 0.28 percent raise. Were it not for trade agreements that pit
American workers in a race-to-the-bottom with poverty-wage workers
worldwide, U.S. workers would see wages increase in a way that more
closely tracks productivity increases. Trade pacts that require
companies to respect workers' rights to organize a union would empower
workers in developing countries to fight to raise their wages also.
Special protections included in ``free trade'' agreements for
certain sectors, such as Big Pharma, increase consumer prices. As bad
trade deals push down our wages, these deals also include provisions
that directly jack up consumer prices. Special protections for Big
Pharma included in WTO and NAFTA required the United States to provide
them longer monopoly patent protections. Did the U.S. Congress really
intend to extend U.S. drug patent terms from the pre-WTO and pre-NAFTA
17-year terms to the WTO and NAFTA-required 20-year terms? And, what is
such protectionism doing in a ``free trade'' agreement? The University
of Minnesota's School of Pharmacy found that the WTO and NAFTA windfall
patent extensions cost U.S. consumers at least $6 billion in higher
drug prices and increased Medicare and Medicaid costs nearly $1.5
billion just for drugs then under patent.\2\ The University of
Minnesota study only covers medicines that were under patent in 1994,
so the total cost to us is much higher.\3\
How our trade policy is suppressing American wage levels. Trade's
downward pressure on our wages comes from both the import of cheaper
goods made by poorly-paid workers abroad (displacing goods made by
better-paid U.S. workers) and threats during wage bargaining by
employers that they will move overseas. The result is growing
inequality among Americans, with workers losing while the richest few
enjoy massive gains. The pro-Fast Track Peterson Institute for
International Economics estimates that as much as 39 percent of the
observed growth in U.S. wage inequality is attributable to trade
trends.\4\ Most proponents of the NAFTA-WTO status quo trade model
acknowledge this connection. But they argue that even so, U.S. workers
win when imports produced by low-paid workers overseas increase because
it means cheaper stuff for all of us. However, in fact when the actual
data is plugged into the trade theory, the reality is quite different.
Now for the vast majority of Americans, the gains in lower prices
from trade are being outweighed by wage losses--meaning net losses for
most. When the non-partisan Center for Economic and Policy Research
applied the actual data to the trade theory, they discovered that when
you compare the lower prices of cheaper goods to the income lost from
low-wage competition under our current policy, the trade-related losses
in wages hitting the vast majority of American workers outweigh the
gains in cheaper priced goods from trade. U.S. workers without college
degrees (over 70 percent of us) lost an amount equal to 12.2 percent of
their wages, so for a worker earning $25,000 a year, the loss would be
more than $3,000 per year! \5\ Talk about unfair trade. We need new
trade agreements and policies that guarantee that the gains from trade
outweigh the losses for most Americans.
Before Fast Track we had balanced trade; since it was instituted,
the U.S. trade deficit has exploded as imports surged. The pre-Fast
Track period was one of balanced trade for the United States and rising
living standards for most Americans. In fact, in 1973, the United
States had a slight trade surplus, as it had in nearly every year since
World War II. But in every year since Fast Track was first implemented,
the United States has run a trade deficit. And since Fast Track got us
into NAFTA and the WTO, the U.S. trade deficit surged from under $100
billion to nearly $800 billion--that is 6 percent of national income!
This huge trade deficit is widely agreed to be unsustainable, meaning
unless we implement policies to shrink that deficit, the U.S. and
global economies are exposed to risk of crisis, shock and instability.
Imports into the United States from the countries with whom the
United States has FTAs are growing considerably faster than exports
from the United States, meaning our FTAs are actually increasing the
U.S. trade deficit. USTR has claimed that U.S. exports to countries
with which we have FTAs beat non-FTA exports, however to come up with
the data they use to support this claim, they conveniently exclude the
three FTA nations with which we have the biggest deficits: Mexico,
Canada and Israel. When you put these nations back into the
calculation, the U.S. annual export growth rate 2001-2006 to our FTA
partners is 22.67 percent--below U.S. exports to non-FTA nations and to
the world as a whole. In fact, the Bush Administration itself knows
well that U.S. FTAs lead to growth in bilateral trade deficits. In an
October 2006 speech to a Korean audience, Deputy USTR Karan Bhatia said
that it was a myth that ``The U.S. will get the bulk of the benefits of
the FTA. If history is any judge, it may well not turn out to be true
that the U.S. will get the bulk of the benefits, if measured by
increased exports. From Chile to Singapore to Mexico, the history of
our FTAs is that bilateral trade surpluses of our trading partners go
up'' [italics added].\6\
The United States has large and growing trade deficits with all of
its major FTA partners and with the group of FTA nations as a whole.
And in the cases of Mexico and Jordan, we went from small surpluses to
large deficits. There are no tricks here: all 13 FTA nations are
presented in order of accession. Since USTR didn't adjust for
inflation, we didn't either. USTR included several FTA nations that
haven't had a full calendar year of FTA treatment (and others like
CAFTA nations whose U.S. exports temporarily crashed due to the
Administration's embarrassing textile rules of origin mix-up): we give
the administration benefit of the doubt and compare the full year-to-
year trade balance. As you can see, the small surpluses we now (and
perhaps temporarily) enjoy with the tiny CAFTA markets do not outweigh
the large and growing deficits with our more important FTA partners.
Numbers in italic and in parentheses represent deficits.
Table 1.--U.S. FTAs = Large and Growing Trade Deficits
----------------------------------------------------------------------------------------------------------------
Date of Entry Trade $ Change from Entry
Country Entry Date Balance 2006 Trade Balance to Present
----------------------------------------------------------------------------------------------------------------
Israel* 1985 ($651,386,137) ($11,062,816,493) ($10,411,430,356)
----------------------------------------------------------------------------------------------------------------
Canada 1989 ($13,010,182,276) ($104,807,513,391) ($91,797,331,115)
----------------------------------------------------------------------------------------------------------------
Mexico 1994 $530,787,754 ($82,493,273,675) ($83,024,061,429)
----------------------------------------------------------------------------------------------------------------
Jordan 2001 $110,019,449 ($797,938,097) ($907,957,546)
----------------------------------------------------------------------------------------------------------------
Chile 2004 ($1,771,368,610) ($3,330,114,125) ($1,558,745,515)
----------------------------------------------------------------------------------------------------------------
Singapore 2004 $3,001,393,110 $4,161,051,450 $1,159,658,340
----------------------------------------------------------------------------------------------------------------
Australia 2005 $7,278,102,445 $8,592,539,836 $1,314,437,391
----------------------------------------------------------------------------------------------------------------
Morocco 2006 $49,296,037 $322,704,253 $273,408,216
----------------------------------------------------------------------------------------------------------------
CAFTA-DR: 2006
----------------------------------------------------------------------------------------------------------------
El Salvador .................. ($203,985,314) $240,060,256 $444,045,570
----------------------------------------------------------------------------------------------------------------
Guatemala .................. ($457,372,341) $195,816,702 $653,189,043
----------------------------------------------------------------------------------------------------------------
Honduras .................. ($603,278,117) ($163,867,841) $439,410,276
----------------------------------------------------------------------------------------------------------------
Nicaragua .................. ($592,042,526) ($820,712,923) ($228,670,397)
----------------------------------------------------------------------------------------------------------------
Bahrain 2006 ($119,873,998) ($161,641,962) ($41,767,964)
----------------------------------------------------------------------------------------------------------------
Total FTA Deficit .................. ................... ($190,125,706,010)
----------------------------------------------------------------------------------------------------------------
Source: U.S. International Trade Commission numbers. (*Measured since 1989 due to data availability; 2006 FTAs' deficit growth measured 2006 relative to 2005.)
Now the United States is even poised to become a net food importer!
Unbelievably, due to this import surge, the United States is even
becoming a net food importer. While U.S. farmers were told by NAFTA-WTO
supporters that they would be ``breadbasket to the world,'' nearly
300,000 family farms have been shuttered since the pacts went into
effect.\7\ Now we're importing massive amounts of the grains and feeds
we also export, and running a deficit in most categories of foods that
wind up on our dinner table, including fruits, vegetables and more.\8\
We can reverse this mess, and we must to avoid major economic damage.
Over 3 million American manufacturing jobs--1 out of every 6--lost.
The U.S. manufacturing sector has long been a source of innovation,
productivity, growth and good jobs.\9\ But by the end of 2006, the
United States had only 14 million manufacturing jobs left--nearly 3
million fewer than before NAFTA and the WTO.\10\ The U.S. Labor
Department has a list of nearly 1.7 million U.S. workers that have
specifically lost their job to trade during the NAFTA-WTO era--and that
is under just one narrow program that excludes many of the trade pacts'
victims.\11\ Further, the non-partisan Economic Policy Institute
estimates that as many as 7 million additional manufacturing jobs could
have been supported in the U.S. economy were it not for this massive
trade deficit caused by our bad trade policy.\12\ The good news is that
this outcome is neither random nor inevitable: bad policy led to bad
results. We can change our trade policymaking process and get good
agreements that create good jobs--and rebuild our now-dwindling ability
to manufacture the products on which our Nation's very security and
well-being rely.
Devastation of America's manufacturing base is eroding the tax base
that supports our schools and hospitals. The erosion of our
manufacturing base during the Fast Track era means fewer firms and
fewer well-paid workers to contribute to local tax bases. Research has
shown that the broader the manufacturing base, the wider is the local
tax base and offering of social services.\13\ With the loss of
manufacturing, fiscal resources that could be used for social services
declined,\14\ while welfare enrollments increased.\15\ This has
resulted in the virtual collapse of some local governments.\16\ These
``trade'' pacts also undermine our access to essential services by
requiring that many services be privatized and/or deregulated so that
public services are transformed into new for-profit commodities that
only those who can afford to purchase can obtain.\17\
The off-shoring of American jobs is moving rapidly up the income
and skills ladder. Economy.Com estimates that nearly one million U.S.
jobs have been ``off-shored'' since early 2001 alone, with 1 in 6 of
those in Information Technology, engineering, financial services and
other business services.\18\ Progressive Policy Institute, a pro-NAFTA-
WTO think tank, found that 12 million information-based U.S. jobs--54
percent paying better than the median wage--are highly susceptible to
off-shoring.\19\ Independent academic studies put the number of jobs
susceptible to off-shoring much higher. Alan Blinder, a former Fed
vice-chair, Princeton economics professor, and NAFTA-WTO supporter,
says that 28 to 42 million service sector jobs (or about 2 to 3 times
the total number of current U.S. manufacturing jobs) could be off-
shored in the foreseeable future.\20\ Yet, if we were to implement
policies to forbid off-shoring of certain types of jobs to nations that
do not provide adequate privacy protections for confidential health and
financial data for example, we could have a much lower rate of job off-
shoring. Europe already has this policy in place.\21\
Bad trade policy downgrades quality of U.S. jobs available. Trade
affects the types and quality of jobs available--and our wage levels--
not the number of total jobs. We lost millions of manufacturing jobs
during NAFTA and WTO, but overall unemployment has been fairly stable
as new service sector jobs were created. Proponents of the NAFTA-WTO
status quo often raise this point to claim that recent trade policies
have not hurt most American workers. But, what they do not mention is
that the quality of jobs available to the majority of U.S. workers--and
the wages we can earn--have all been degraded by our trade policy. For
instance, the average worker displaced during this period from
manufacturing went from earning $40,154 to $32,123 when re-
employed.\22\ The loss of workers' bargaining power caused by so many
off-shored U.S. jobs--first in manufacturing, now in services too--
means stagnant wages for all of us. Under NAFTA and WTO we are forced
to compete in the same labor market as poor countries' less-than-$1 per
day workers in a perpetual race-to-the-bottom.
2. The Results of Current U.S. Trade Policy: Increased Income
Inequality in the U.S. and Worldwide
The inequality between rich and poor in America has jumped to
levels not seen since the Robber Baron era. The richest 10 percent of
Americans are taking nearly half of the economic pie, while an even
more elite group--the top 1 percent of the income distribution--is
taking nearly a sixth of the pie. Rich Americans' share of national
income was stable for the first several decades after World War II but
shot up 40 percent for the richest 10 percent and 124 percent for the
richest 1 percent between 1973 and 2005--the Fast Track era.\23\ Nearly
all economists agree that our trade policy has partially driven this
widening inequality. We must replace the trade policies causing this
rift. Reversing this trend is vital to the health of American
democracy.
How could American workers' productivity double, but wages stay
flat? Trade policy shifts during the Fast Track era also have had a
direct impact on American workers' ability to bargain for higher wages.
In the past, American workers represented by unions were able to share
in the economic gains generated by productivity increases--by
bargaining for their fair share. But since the Fast Track-enabled NAFTA
and WTO went into effect, as many as 62 percent of U.S. union drives
face employer threats to relocate abroad, according to U.S. government-
commissioned studies. And indeed, the factory shut-down rate following
successful union certifications tripled since NAFTA went into
effect.\24\ Meanwhile, these deals forbid Federal and state governments
from requiring that U.S. workers perform the jobs created by the
outsourcing of government work. Such ``anti-off-shoring'' policies--as
well as prevailing wage laws designed to ensure goods wages for
construction work--are subject to challenge in foreign tribunals for
violating the pacts' rules. The Fast Track-hatched trade agreements'
attack on America's working families' ability to lift themselves up has
led increasing numbers to turn against any active expansion of
international trade.\25\ We need a new way to make U.S. trade
agreements that guarantees working families' get a fair shake.
The worldwide gulf between rich and poor has also widened since
Fast Track. Remember all the hype about how these trade agreements
would reduce poverty in the developing countries? We still hear this
line today. Yet, the reality is that the corporate globalization era
policies enabled by Fast Track have increased income inequality between
developed and developing countries. Income inequality has also
increased between rich and poor within many nations under this
retrograde trade model. In 1960, the 20 richest nations earned per
capita incomes 16 times greater than non-oil producing, less developed
countries. By 1999, the richest countries earned incomes 35 times
higher, signifying a doubling of the income inequality.\26\ According
to one United Nations study, the richest 1 percent of the world's
population receives as much as the poorest 57 percent.\27\ According to
another U.N. study, ``in almost all developing countries that have
undertaken rapid trade liberalization, wage inequality has increased,
most often in the context of declining industrial employment of
unskilled workers and large absolute falls in their real wages, on the
order of 20-30 percent in Latin American countries.'' \28\ The gap is
worsening over time, but a trade policy designed to benefit the
majority can turn this trend around.
3. Fast Track's Legacy: Stagnant Growth, Poverty and Hunger in Poor
Countries
Progress on growth and social development in poor countries slows
during the Fast Track era. Increasing economic growth rates mean a
faster expanding economic pie. With more pie to go around, the middle
class and the poor have an opportunity to gain without having to
``take'' from the rich--often a violent and disruptive process. But the
growth rates of developing nations slowed dramatically in the Fast
Track period. For low- and middle-income nations, per capita growth
between 1980 and 2000 fell to half that experienced between 1960 and
1980! The slowdown in Latin America was particularly harmful. There,
income per person grew by 75 percent in the 1960-1980 period, before
the International Monetary Fund (IMF) began imposing the same package
of economic, investment, and trade policies found in NAFTA and the WTO.
Since adopting the policies, per capita income growth in Latin America
plunged to 6 percent in the 1980-2000 period. Even when taking into
account the longer 1980-2005 period, there is no single 25-year window
in the history of the continent that was worse in terms of rate of
income gains. In other world regions, growth also slowed dramatically,
while in Sub-Saharan Africa, income per person actually shrank 15
percent after the nations adopted the policy package also required
under the WTO and NAFTA! \29\ Improvement measured by human
indicators--in particular life expectancy, child mortality, and
schooling outcomes--also slowed for nearly all countries in the Fast
Track period as compared with 1960-1980.\30\ In numerous Latin American
countries, people have risen up at the ballot box to elect new
governments that reject these failed policies and who are implementing
better alternatives--providing a hopeful example to the world.
Poverty, hunger and displacement on the rise. The share of the
population living on less than $2 a day in Latin America and the
Caribbean rose following the implementation of NAFTA-WTO-style
policies. And the share of people living on less than $1 a day (the
World Bank's definition of extreme poverty) in the world's poorest
regions, including Sub-Saharan Africa and the Middle East, has
increased during the same period,\31\ as the IMF and World Bank and
then WTO imposed this model. According to the Food and Agriculture
Organization, global efforts toward reducing hunger have ``stalled
completely worldwide'' during the WTO era.\32\ During the Fast Track
era, as nations have begun adopting NAFTA-WTO style policies--from
Mexico \33\ to China \34\ and beyond--the displaced rural poor have had
little choice but to immigrate to wealthy countries or join swelling
urban workforces where the oversupply of labor suppresses wages,
exacerbating the politically and socially destabilizing crisis of
chronic under- and unemployment in the developing world's cities. After
NAFTA, Mexican immigration to the United States jumped 60 percent after
over a million campesinos lost their livelihoods to NAFTA-style
policies.\35\ Desperation and social instability is growing among many
poor nations' vast rural populations. According to the Indian
government, thousands of farmers bankrupted by trade policies commit
suicide every year, leaving their children and families without
alternate means of support.\36\ Both American workers and farmers and
our counterparts in poor countries are all suffering under the current
trade and globalization system--united, they represent a global
majority for a change of course.
Developing countries that did not adopt the package fared better.
In sharp contrast, nations that chose their own economic mechanisms and
policies through which to integrate into the world economy had more
economic success. For instance, China, India, Malaysia, Vietnam, Chile,
and Argentina since 2002, have had some of the highest growth rates in
the developing world over the past two decades--despite largely
ignoring the directives of the WTO, IMF or World Bank.\37\ It is often
claimed that the successful growth record of countries like Chile was
based on the pursuit of NAFTA-WTO-like policies. Nothing could be
farther from the truth: Chile's sustained rapid economic growth was
based on the liberal use of export promotion policies and subsidies
that are now considered WTO-illegal.\38\ It is only now that many of
these countries are bringing their policies down to the WTO's anti-
development strictures that their economies are beginning to unravel.
4. Important Domestic Policies Have Been Undermined by ``Trade''
Agreements
Many people are surprised when they first learn that actual trade
between countries is only one element of the policies established and
enforced by NAFTA and the WTO, which also require that countries alter
wide swaths of domestic non-trade policy or face sanctions. NAFTA and
the WTO are dramatically different from all other trade agreements that
preceded them. Traditionally, trade agreements focused on tariffs,
quotas and border customs inspections. NAFTA and the WTO exploded the
boundaries of what was included in trade pacts, establishing over 800
pages of non-tariff policies to which signatory countries must conform
their domestic laws. Those new agreements set constraints on signatory
countries' domestic food safety standards, environmental and product
safety rules, service-sector regulation, investment and development
policy, intellectual property standards, government procurement rules,
tax policy and more. A key WTO and NAFTA provision specifically
requires each signatory country to ensure the conformity of all of its
laws, regulations and administrative procedures to the agreements'
terms.\39\ Other WTO and NAFTA signatory nations--and foreign investors
through NAFTA and its various extensions such as the Central America
Free Trade Agreement (CAFTA) and other bilateral FTAs--can challenge
U.S. national or local policies before an international tribunal for
failure to comply with the agreements' terms. Nations whose policies
are judged not to conform to the agreements' rules are ordered to
eliminate them or face permanent trade sanctions.
One commenter called NAFTA a ``hunting license'' for those seeking
to challenge state laws in the name of ``free trade.'' \40\
Unfortunately, the evidence has borne this out, as a range of non-trade
issues reserved for state and local governments--such as local
prevailing wage laws and other procurement policies; state and local
``Buy America'' procurement policies; low-cost healthcare programs;
higher education policy; and state funding for public services, the
environment, and even local libraries--are now under current NAFTA or
WTO jurisdiction, or are being targeted for such by trade negotiators
around the globe. The U.S. State Department, lobbying about how a state
law might violate WTO, pressured Maryland state legislators to drop a
procurement policy aimed at promoting human rights in Nigeria.
California Governor Schwarzenegger vetoed a California law requiring a
portion of highway pavement to use recycled tires because this would
violate trade agreement procurement rules.
The United States is the country which has faced the largest number
of WTO challenges to its laws, and has lost 86 percent of such cases.
The diversity of U.S. laws that have been successfully challenged using
WTO or NAFTA is stunning. The United States has been ordered by a NAFTA
tribunal to open its road to Mexico-domiciled trucks regardless of
whether the vehicles or drivers meet U.S. safety standards. Under the
WTO, U.S. tax, environmental, anti-dumping, safeguard, procurement and
gambling policies have all been challenged. The United States has been
the number one target of challenges at the WTO, where domestic laws are
almost always ruled against in tribunal hearings. The United States'
record at the WTO is also unique in that its win record for cases it
has brought against other countries at WTO is lower than the average
win rate, as you can see in this table.
U.S. WTO Disputes
------------------------------------------------------------------------
All Disputes
United States as United States as (including U.S.
Complainant Respondent and non-U.S.
cases)
------------------------------------------------------------------------
Complainant Win 24 43 114
------------------------------------------------------------------------
Respondent Win 5 7 15
------------------------------------------------------------------------
% Cases Won By 82.8% 86.0% 88.4%
Complainant
------------------------------------------------------------------------
The United States has lost an array of WTO attacks against domestic
public interest laws, a pattern which extends to successful WTO attacks
on other nations' environmental, food safety and other public interest
laws. The United States weakened gasoline cleanliness standards after a
successful WTO assault on Clean Air Act regulations by several
countries. Even though the United States signed a global environmental
treaty called the Convention on International Trade in Endangered
Species, American rules requiring shrimp fishers not to kill sea
turtles were diluted after a WTO challenge to U.S. Endangered Species
Act regulations enforcing the treaty. The U.S. Marine Mammal Protection
Act was weakened after Mexico threatened WTO action to enforce an
outstanding ruling against the law under the General Agreement on
Tariffs and Trade (GATT). Now the dolphin-safe label no longer means
that tuna caught with dolphin-deadly encirclement nets is banned from
U.S. stores, but that tuna can bear the dolphin-safe label as long as
no dolphin death was observed! These are only a few of the negative
results of 9 years of WTO implementation.
Non-Trade Public Interest Laws Challenged at WTO
------------------------------------------------------------------------
All Public Public Interest Public Interest
Interest Disputes-- U.S. Disputes-- U.S.
Disputes as Complainant as Respondent
------------------------------------------------------------------------
Complainant Win 16 7 5
------------------------------------------------------------------------
Respondent Win 3 2 0
------------------------------------------------------------------------
% Cases Won By 84.2% 77.8% 100%
Complainant
------------------------------------------------------------------------
Domestic laws having nothing to do with trade have been
successfully attacked, including the U.S. ban on Internet gambling. A
WTO enforcement panel just ruled that the U.S. Government failed to
comply with a 2005 final WTO order to change certain laws related to
the U.S. ban on Internet gambling. The WTO Internet gambling ruling
implicates large swaths of state and Federal gambling law unrelated to
online gaming as potential trade barriers, and a follow-on WTO
challenge already has been threatened by the European Union. The ruling
clears the way for Antigua, which challenged the ban, to demand
compensation from the United States, and if an agreeable deal cannot be
struck, to impose trade sanctions. To exact compliance, Antigua could
suspend benefits it extends to the United States under other WTO
agreements. Antigua could, for instance, suspend its observance of
copyright and patent protections required by the WTO to a degree deemed
equivalent to Antigua's commercial losses from its Internet gambling
operations being excluded from the U.S. market. One of the most
significant consequences of the WTO's 2005 ruling is that an array of
common state gambling regulations such as gambling bans, state
lotteries or exclusive Indian gaming rights, which have the unintended
effect of keeping out private European lotteries and casinos, were
implicated as trade violations and placed in jeopardy of future
challenges. In 2005, 29 state attorneys general wrote the Bush
Administration seeking withdrawal of the gambling sector from WTO
jurisdiction. The WTO GATS agreement allows nations to ``take back''
service sectors from WTO jurisdiction, but only after compensating
trading partners for lost business opportunities. The Bush
Administration has refused to do so.
There have been 35 WTO attacks on U.S. anti-dumping, countervailing
duty, and safeguard (AD-CVD) law and the United States lost 33 of these
cases.
Anti-Dumping/Countervailing Duty/Safeguards Disputes
------------------------------------------------------------------------
All AD/CVD/SG
United States as United States cases (any
Complainant as Respondent country as
Respondent)
------------------------------------------------------------------------
Complainant Win 2 33 49
------------------------------------------------------------------------
Respondent Win 0 4 6
------------------------------------------------------------------------
% Cases Won By 100% 89.2% 89.1%
Complainant
------------------------------------------------------------------------
Multi-million dollar cases against the United States are pending
under NAFTA's ``Chapter 11'' foreign investor protection enforcement
system, while the cost of successfully defending just one NAFTA Chapter
11 attack on U.S. law cost $3 million. Canadian cattle producers are
using NAFTA to demand $300 million in compensation from U.S. taxpayer
funds, claiming that the Canadian cattle import ban instituted after
mad cow disease was found in Canada violates their NAFTA rights. A
Canadian tobacco company is using the private NAFTA tribunals to attack
the U.S. tobacco settlements. A California regulation requiring the
backfilling of open-pit mines has been challenged by a Canadian mining
enterprise, which plans to develop a giant open-pit cyanide gold mine
in Imperial Valley, California, and which owns and operates similar
mines around the world. These are among the 48 cases or claims filed
thus far by corporate interests and investors under NAFTA's ``Chapter
11'' investor provisions, which grant foreign interests more expansive
legal rights and privileges than those enjoyed by U.S. citizens or
corporations. With only 14 of the 48 cases finalized, some $36 million
in taxpayer funds have been granted to five corporations that have
succeeded with their claims. These cases include successful attacks on
a government's use of zoning laws and operating permits to regulate a
toxic waste dump closed for contamination problems, the ban on cross-
border PCB trade, the ban of a toxic chemical and logging regulations.
An additional $28 billion has been claimed from investors in all three
NAFTA nations. The U.S. Government's legal costs for the defense of
just one recent case topped $3 million. Seven cases against the United
States are currently in active arbitration.
Imports of food into the United States have soared under the WTO
and NAFTA while inspection has declined and ``equivalence'' rules
requires us to accept food that does not meet our standards. The WTO
and NAFTA have resulted in a dramatic increase of dangerous food being
imported into the United States.\41\ The rules of these agreements have
also greatly restricted the United States' ability to protect the
public from unsafe food. Imported food is more than three times more
likely to be contaminated with illegal pesticide residues than U.S.-
grown food, according to new analysis of FDA data. Meanwhile U.S. food
imports have skyrocketed, U.S. inspections of imported food have
declined significantly.\42\ Imports of Mexican crops documented by the
U.S. Government to be at a high risk of pesticide contamination have
dramatically increased under NAFTA, while inspection has decreased.
Approximately 74 U.S. import inspectors are responsible for inspecting
nearly 2.4 billion pounds of imported meat and poultry. Food-borne
illness is on the rise globally and in the United States due in part to
the ``globalization'' of the food supply. NAFTA and WTO require the
United States to accept imports of food meeting ``equivalent'' but no
U.S. safety standards. For instance, the Uruguay Round Agreements Act
made statutory changes to the Federal Meat Inspections Act and the
Poultry Products Inspection Act that in 1995 resulted in a minor,
seemingly insignificant change to the U.S. meat and poultry
regulations, when the words ``equal to'' were replaced with the word
``equivalent''--a statutory change in the trade implementing
legislation that was then used to change the regulations applying to
imported meat.\43\ Under the trade agreement-required new rules, more
than 40 nations' meat inspection systems have been declared equivalent
and imports are now allowed and obtain USDA labels, even though some of
this imported food is inspected by company employees, not independent
government inspectors as required under U.S. law.\44\
Conclusion: Replace the Past Track With a Good Process to Change Course
from Our Failed Status Quo Trade Policies
Fast Track was designed 30 years ago as a way to deal with
traditional tariff and quota-focused trade deals. Today's ``trade''
agreements affect a broad range of domestic non-trade issues like local
prevailing wage laws, Buy-America procurement policy, anti-offshoring
measures, food safety, land use and zoning, the environment and even
local tax laws. Congress, state officials and the public need a new
modern procedure for developing U.S. trade policy that is appropriate
to the reality of 21st century globalization agreements.
Fast Track's structural design ensures Congress cannot hold
Executive Branch negotiators accountable to meet the negotiating
objectives Congress sets in Fast Track legislation. Thus, simply adding
new negotiating objectives to the existing Fast Track structure, for
instance regarding labor and environmental issues, will not result in
trade agreements that reflect Congress' goals and objectives. In fact,
the 1988 Fast Track used to negotiate and pass NAFTA and WTO explicitly
required that labor rights be included in U.S. trade agreements.
President George Herbert Walker Bush and his negotiators simply ignored
these objectives, while satisfying the negotiating objectives desired
by their business supporters. Under Fast Track, the Bush Administration
was empowered to sign such agreements despite failing to meet Congress'
labor rights objectives and submit them for a no-amendments, expedited
vote. Members of Congress were thus forced into a position of having to
vote against these entire agreements, having no earlier recourse to
ensure the agreements met the objectives necessary to make them
supportable.
This is because Fast Track ensures that Congress' role is performed
too late to do any good: Congress only gets a ``yes'' or ``no'' vote on
a trade agreement after it's been signed and ``entered into.'' That
vote also OKs hundreds of changes to wide swaths of U.S. non-trade law
to conform our policies to what the ``trade'' deals require. By
eliminating Congress' right to approve an agreement's contents before
it is signed, Fast Track also allows outrageous provisions to be
``super glued'' onto actual trade provisions. Did the U.S. Congress
really intend to extend U.S. drug patent terms from the pre-WTO 17-year
terms to the WTO-required 20-year terms? Because under Fast Track,
Congress never had the ability to review, much less vote on the WTO
text before it was signed, this and numerous other outrageous non-trade
policy changes were bundled in with legitimate trade provisions.
Federalism is also flattened by Fast Track. In a form of
international pre-emption, state officials also must conform our local
laws to hundreds of pages of non-trade domestic policy restrictions in
these ``trade'' pacts, yet state officials do not even get Congress'
cursory role. Fast Track is how we got stuck with NAFTA, WTO and other
race-to-the-bottom deals.
Fast Track trashes the ``checks and balances'' that are essential
to our democracy--handcuffing Congress, state officials and the public
so we cannot hold U.S. negotiators accountable during trade
negotiations while corporate lobbyists call the shots. In one lump sum,
Fast Track:
Delegates away Congress' ability to veto the choice of
countries with which to launch negotiations.
Delegates away Congress' constitutional authority to set the
substantive rules for international commerce. Congress lists
``negotiating objectives,'' but these are not mandatory or
enforceable and Executive Branch negotiators regularly ignore
them. In fact, the 1988 Fast Track used for NAFTA and WTO
explicitly required that labor rights be included in U.S. trade
agreements.
Fast Track permits the Executive Branch to sign trade
agreements before Congress votes on them, locking down the text
and creating a false sense of crisis regarding congressional
wishes to change provisions of a signed agreement.
Fast Track empowers the Executive Branch to write
legislation (Congress' constitutional role), circumvent normal
congressional committee review, suspend Senate cloture and
other procedures, and have guaranteed ``privileged'' House and
Senate floor votes 90 days after the president usurps one more
congressional role by submitting legislation (Congress' role).
Fast Track rules forbids all amendments and permits only 20
hours of debate on the signed deal and conforming changes to
U.S. law.
All of these authorities are transferred to the Executive Branch
conditioned only on the requirement the Executive Branch gives Congress
90-day notice of its intent to start negotiations with a country and
then another 90-day notice before it signs a completed agreement.
Congress has no recourse to revoke its delegation of authority if the
Executive Branch ignores the negotiating objectives Congress lists in
its Fast Track statutes. The closed rule, expedited procedures for
consideration can only be revoked for failure to go through specific
notices and formal consultations, while failure to listen is not
actionable.
Fast Track must be replaced so that we can steer a new course on
trade policy. Critical to such a new system is restoring Congress'
ability to control the contents of U.S. trade agreements, as well as
empowering Congress to decide with which countries it is in our
national interest to negotiate new agreements. Because the Constitution
grants the Executive Branch the exclusive authority to negotiate on
behalf of the United States with foreign sovereigns, a system of
cooperation between the Congress and Executive Branch is needed.
However, in contrast to Fast Track, which by its very structural design
sidelines Congress, a new trade negotiating mechanism must provide
early and regular opportunities for Congress to hold negotiators
accountable to the substantive objectives Congress sets.
This is needed to ensure future pacts contain terms beneficial to
most Americans. With a new forward-looking trade negotiating process,
we can ensure U.S. trade expansion policy meets the needs of America's
working families, farmers and small businesses.
Endnotes
\1\ Article 1-7-clause 1: ``All bills for raising Revenues shall
originate in the House of Representatives, but the Senate may propose
or concur with Amendments as on other Bills.''
\2\ Stephen W. Schondelmeyer, ``Economic Impact of GATT Patent
Extension on Currently Marketed Drugs,'' PRIME Institute, College of
Pharmacy, University of Minnesota, March 1995, at Table 1.
\3\ Stephen W. Schondelmeyer, ``The Extension of GATT Patent
Extension on Currently Marketed Drugs,'' PRIME Institute, University of
Minnesota, March 1995, at 6-7.
\4\ William Cline, Trade and Income Distribution, (Washington,
D.C.: Peterson Institute for International Economics, 1997).
\5\ Dean Baker and Mark Weisbrot, ``Will New Trade Gains Make Us
Rich?'' Center for Economic and Policy Research (CEPR) Paper, October
2001.
\6\ Remarks by Ambassador Karan Bhatia, Deputy U.S. Trade
Representative at Yonsei University, Oct. 24, 2006. Available at http:/
/seoul.usembassy.gov/embact102406.html.
\7\ From numbers for the USDA's ``limited resources,'' ``farming
occupation--lower sales,'' and ``farming occupation--higher sales''
farm typology categories. See USDA's Economic Research Service's ``Farm
Business and Household Survey Data: Customized Data Summaries for
Agricultural Resource Management Survey,'' for numbers after 1996, and
``Farm structure: historic data on farm operator household income''
data tables for numbers prior to 1996.
\8\ Foreign Agricultural Trade of the United States, available at
http://www.ers.usda.gov/Data/FATUS/.
\9\ Bob Baugh and Joel Yudken, ``Is Deindustrialization
Inevitable?'' New Labor Forum, 15(2), Summer 2006.
\10\ L. Josh Bivens, ``Trade Deficits and Manufacturing Job Loss:
Correlation and Causality,'' Economic Policy Institute Briefing Paper
171, March 14, 2006.
\11\ Department of Labor Trade Adjustment Assistance
certifications, at http://www.citizen.org/trade/forms/taa_info.cfm.
\12\ Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, State
of Working America 2006-2007, (Washington, D.C.: Economic Policy
Institute, 2006), Table 3.30 at 175.
\13\ Henri Capron and Olivier Debande, ``The Role of the
Manufacturing Base in the Development of Private and Public Services,''
Regional Studies, Vol. 31:7, October 1997, at 681. For an overview of
these issues, see Adam Hersh and Christian Weller, ``Does Manufacturing
Matter?'' Challenge, vol. 46, no. 2, March-April 2003.
\14\ Corliss Lentz, ``Why Some Communities Pay More Than Others?
The Example of Illinois Teachers,'' Public Administration Review, 58:2,
March-April 1998. This study shows that high levels of manufacturing
employment are associated with higher starting salaries for public
school educators.
\15\ David Brady and Michael Wallace, ``Deindustrialization and
Poverty: Manufacturing Decline and AFDC Recipiency in Lake County,
Indiana, 1964-93,'' Sociological Forum, Vol. 16, Number 2, 2001.
\16\ Robert Forrant, ``Greater Springfield Deindustrialization:
Staggering Job Loss, A Shrinking Revenue Base, and Grinding Decline,''
University of Massachusetts-Lowell Working Paper, April 2005.
\17\ See http://www.citizen.org/trade/subFederal/services/ for more
detail.
\18\ Marla Dickerson, ```Off-shoring' Trend Casting a Wider Net,''
Los Angeles Times, Jan. 4, 2004.
\19\ Robert D. Atkinson, ``Understanding the Offshore Challenge,''
Progressive Policy Institute Policy Report, May 24, 2004.
\20\ Alan S. Blinder, ``Off-shoring: The Next Industrial
Revolution?'' Foreign Affairs, March-April 2006.
\21\ Lori Wallach, Fiona Wright and Chris Slevin, ``Addressing the
Regulatory Vacuum: Policy Considerations Regarding Public and Private
Sector Service Job Off-shoring,'' Public Citizen's Global Trade Watch,
June 2004.
\22\ Lael Brainard, Robert E. Litan, and Nicholas Warren,
``Insuring America's Workers in a New Era of Off-shoring,'' Brookings
Institution Policy Brief No. 143, July 2005, at 2.
\23\ Thomas Piketty and Emmanuel Saez, ``The Evolution of Top
Incomes: A Historical and International Perspective,'' National Bureau
of Economic Research Paper 11955, January 2006; numbers updated through
2005 in a March 2007 extract.
\24\ Kate Bronfenbrenner, ``The Effects of Plant Closing or Threat
of Plant Closing on the Right of Workers to Organize,'' North American
Commission for Labor Cooperation Report, 1997.
\25\ Peronet Despeignes, ``Poll: Enthusiasm for free trade fades;
Dip sharpest for $100K set; loss of jobs cited,'' USA Today, Feb. 24,
2004.
\26\ UNCTAD, Least Developed Countries Report, 2002, at 17.
\27\ U.N. Development Program, ``Human Development Report:
Millennium Development Goals: A compact among nations to end human
poverty,'' 2003, at 39.
\28\ United Nations Conference on Trade and Development (UNCTAD),
Least Developed Countries Report, 1998, at 3.
\29\ Mark Weisbrot, Robert Naiman and Joyce Kim, ``The Emperor Has
No Growth: Declining Economic Growth Rates in the Era of
Globalization,'' CEPR Paper, November 2000.
\30\ Mark Weisbrot, Dean Baker and David Rosnick, ``Scorecard on
Development: 25 Years of Diminished Progress,'' CEPR Paper, September
2006.
\31\ Shaohua Chen and Martin Ravaillon, ``How Have the World's
Poorest Fared since the Early 1980s?'' World Bank Research Observer,
Vol. 19, Number 2, 2004, at 152-3.
\32\ Food and Agriculture Organization, ``The State of Food
Insecurity in the World,'' United Nations Report, 2005, at 6.
\33\ Carlos Salas, ``Between Unemployment and Insecurity in
Mexico,'' Economic Policy Institute, September 2006.
\34\ ``Chinese farmers face bleak future,'' BBC News, Dec. 14,
2000.
\35\ Jeffrey S. Passel and Roberto Suro, ``Rise, Peak and Decline:
Trends in U.S. Immigration 1992-2004,'' September 2005, Pew Hispanic
Center, at 39; George J. Borjas and Lawrence J. Katz, ``The Evolution
of the Mexican-Born Workforce in the United States,'' March 2006; World
Bank data; John Audley, Sandra Polaski, Demetrios G. Papademetriou, and
Scott Vaughan, ``NAFTA's Promise and Reality: Lessons from Mexico for
the Hemisphere,'' Carnegie Endowment for International Peace Report,
November 2003.
\36\ Somini Sengupta, ``On India's Farms, a plague of suicide,''
New York Times, Sept. 19, 2006; Anders Riel Muller and Raj Patel,
``Shining India? Economic Liberalization and Rural Poverty in the
1990s,'' Food First Policy Brief No. 10, May 2004.
\37\ Mark Weisbrot, Dean Baker and David Rosnick, ``Scorecard on
Development: 25 Years of Diminished Progress,'' CEPR Paper, September
2006.
\38\ Todd Tucker, ``The Uses of Chile: How Politics Trumped Truth
in the Neo-Liberal Revision of Chile's Development,'' Public Citizen's
Global Trade Watch, September 2006.
\39\ See e.g., Agreement Establishing the WTO, Article XVI-4.
\40\ Michelle Sager, One Voice or Many? Federalism and
International Trade, (New York: LFB Scholarly Publishing LLC, 2002), at
94.
\41\ U.S. Department of Agriculture, Foreign Agricultural Service
import statistics.
\42\ ``Much Is Being Done To Protect Agriculture From A Terrorist
Attack, But Important Challenges Remain,'' Government Accountability
Office, GAO 05-214, March 2005.
\43\ 60 Fed. Reg. 38667, Jul. 28, 1995.
\44\ ``The WTO Comes to Dinner: U.S. Implementation of Trade Rules
Bypasses Food, Safety Requirements,'' Public Citizen, July 2003.
Senator Dorgan. Ms. Wallach, thank you very much for your
testimony. Next we will hear from John Johnston, who is a
Founding Partner at Modern Metal Cutting, an Akron, Ohio
company that offers precision cutting and machining of steel
products. He is also a Member of the U.S. Business and Industry
Council, an organization that advocates for fair trade
policies. Mr. Johnston, welcome. Thank you for traveling to
this hearing. You may proceed.
STATEMENT OF JOHN JOHNSTON, PARTNER,
MODERN METAL CUTTING, LLC
Mr. Johnston. Good morning, Mr. Chairman, and members of
the Committee and thank you for the opportunity to testify on
the vital question, is free trade working? The short answer is
no and I'll explain why in a minute.
My name is John Johnston and I've been involved in
manufacturing in Ohio for 16 years. My company, Modern Metal
Cutting, offers precision cutting and machining of tubes and
other special shapes. I am active in several regional and
national manufacturing organizations, including an Akron
organization of small companies that do precision metalworking.
I also sit on an organization, NEOCAM and from that vantage
point, I can tell you that Northeast Ohio has been hit
especially hard over the last two decades. Anyone who takes the
short ride into downtown Cleveland from the airport and sees
the abandoned factories knows something has gone wrong and in
the rest of the industrial heartland of our country as well.
I've been committed to strengthening manufacturing in my
home region and state and in the Nation at large all my adult
life, but it seems to me that domestic manufacturers face a
stacked deck. We face predatory foreign competition that U.S.
trade policy has failed to address in a meaningful way. As a
consequence, a major overhaul of U.S. trade policy is needed.
Has free trade worked for Ohio and for Ohio manufacturing?
For me, the answer is clearly no. From 1997 to 2004, goods
production in our manufacturing-heavy state dropped nearly 9
percent in real terms, the worst absolute performance in the
country and the fourth worst in percentage terms. Between 1997
and 2006, Ohio lost more than 22 percent of its total
manufacturing jobs and nearly 25 percent of its jobs in durable
goods industries. Wages in the state's goods producing sector
fell 15.7 percent from 1997 through 2005, the worst performance
in America.
Why do I blame ineffective U.S. trade policies for these
problems? When I look at the recent trade performance of some
of the manufacturing sectors that are among Ohio's largest, it
is difficult to ignore the very strong connection.
For example, between 1997 and 2006, the U.S. trade deficit
for durable goods industries increased by nearly 260 percent
and transportation equipment grew by nearly 155 percent and
fabricated metals, where I work, grew by a factor of 10. In
non-electrical machinery, America ran a surplus of $14.4
billion in 1997. By last year, that had turned into a deficit
of just less than $12 billion.
The U.S. Business and Industry Council calculates that in
the past 10 years, 96 percent of our Nation's key manufacturing
sectors lost shares of their own home U.S. market. In dozens of
cases, imports now control more than half of the U.S. market
and among the biggest losers are high tech sectors such as
aircraft engines and parts as well as machine tools of any
kind, also in power generation equipment. These sectors
represent the heart of any industrial economy in the 21st
century and their loss points to some of the key problems
caused by our misguided trade policies.
As a businessman, I can't help but be worried by these
trends. With our mammoth trade deficit, the United States is
buying far more from the rest of the world than what we are
selling; and I have a hard time believing the rest of the world
is going to continue to fund this over-consumption.
I also keep hearing and reading that I shouldn't be
concerned about the loss of U.S. manufacturing jobs because
it's a sign of soaring productivity. Frankly, I don't see any
correlation between productivity gains and loss of factories
and jobs. Some of our best-run companies are now going to
disappear.
So how exactly has trade policy contributed to these
problems? Two points--the first being, foreign governments
intervene in trade flows all the time in different ways and for
their own benefit. They erect tariff and non-tariff barriers to
protect their own industries. They heavily subsidize producers
on their home soil, including with value-added tax rebates on
exports. They manipulate the exchange rates of their currency.
They steal intellectual property and they dump products into
our market below the cost of what it is to produce it in their
own market.
These trade practices represent the way business is done
all around the world with one exception--the United States. And
yet, U.S. trade policy, for far too long, has aimed at opening
our home market to exactly these types of producers even as
they cheat against us in all the ways I've just described to
you.
Second, our trade deals keep picking the wrong target
countries. We sign trade agreements with developing counties
that simply cannot afford our exports. Bilateral trade
agreements with small, impoverished economies, do very little
to enhance U.S. manufacturing exports. If the main purpose of
U.S. trade policy is to create more business for domestic
companies and enhance the standard of living of the employees,
then our aim has been completely cockeyed.
It's gratifying to see the new and innovative approach that
the 110th Congress is taking on trade policy. I am very
pleased, Mr. Chairman, that you have introduced legislation to
bring our imports and exports into line with an auction quota
system. Enhancing workers' rights and environmental protection
around the globe are all worthy objectives for trade policy
though it is important that the Congress hold firm to its
principles in any negotiation on these issues with the Bush
Administration.
These are all worthy goals and yet they are not sufficient
to aid domestic manufacturers and other producers that create
jobs and wealth and to accomplish that, there must be trade
flows that must change dramatically and significantly and now.
Here is what I believe is really needed. First, a
moratorium on the signing of any new trade agreements until
major pro-domestic producer and worker trade strategies are
identified and put in place. Congress might consider appointing
a broad-based national commission to carry out this mission.
Second, Congress should reject new Fast Track authority
until we have in place trade policies that stop the erosion of
our national industrial base.
Third, we need specific legislation such as the Ryan-Hunter
currency manipulation bill. And further, a border equalization
tax to address the unfair advantage caused by the rebate of VAT
taxes in over 150 of our trading partners.
Institute major legislation to begin to reduce the trade
deficit. The approach could be an import quota, an auction
system, as recommended by Chairman Dorgan or it could be a
trade balancing temporary import surcharge as proposed by
Representative Mike Michaud. These approaches, both of which
could be designed to be consistent with WTO rules, would
rapidly get the trade deficit under control. In addition, they
would save the world trade system as a whole, which is
dangerously out of balance today.
I've listed more detailed recommendations in my written
testimony but these would be an important start. Their passage
would go a long way toward allowing domestic businesses a
chance to compete on a fair and equal basis with our foreign
counterparts.
I thank you for the consideration of my views. I look
forward to answering any questions that you may have.
[The prepared statement of Mr. Johnston follows:]
Prepared Statement of John Johnston, Partner,
Modern Metal Cutting, LLC
Good morning, Mr. Chairman, and Members of the Committee, and thank
you for the opportunity to testify on the vital question ``Is `Free
Trade' Working?'' The short answer is ``no'' and I'll explain why in a
minute.
My name is John Johnston, and I have been involved in manufacturing
in Ohio for 16 years. Two years ago, I helped to found a new metal
services venture called Modern Metal Cutting, which offers our
customers precision cutting and machining of tubes and other metal
shapes.
I have also been active in several regional and national
manufacturing organizations. Since 1997, I have been a Board member of
the Summit County Machine Shop Group, an Akron-area organization of
small companies in the precision metal-working sector. These firms,
generally family-held for generations, specialize in quickly turning
around constantly changing small orders of highly customized parts and
components of larger industrial products. From 2001 to 2006, I served
as the organization's president.
In addition, I sit on the Steering Committee of the Northeast Ohio
Campaign for American Manufacturing or NEOCAM. NEOCAM is a regional
coalition formed to promote awareness of domestic manufacturing's
importance, and to improve its competitiveness. Northeast Ohio has been
hit especially hard over the last two decades by trade policies that
allow our foreign competitors to take advantage of unfair government
programs designed to boost manufacturing--and our government does
nothing in response. Anyone who makes the short ride into downtown
Cleveland from the airport--and sees the abandoned factories--knows
something went very wrong in Northeast Ohio--and the rest of the
industrial heartland.
In recent years I have been pleased to work with the U.S. Business
and Industry Council. This national business organization is composed
of 1,500 member companies that are mainly smaller, family-held domestic
manufacturers. For decades, its Washington advocacy efforts have
focused on ensuring that national-level domestic and international
policies preserve and strengthen industry in the United States. They
supply the national and international political perspective that is
often lacking in our local organizations.
In sum, I have been committed to strengthening manufacturing in my
home region and state, and in the Nation at large, all my adult life. I
want to believe strongly in its future. In fact, I've got my money on
it. But I also want to make very clear that my commitment--and those of
thousands of other manufacturers like me--alone is not enough. No
matter how hard we try, we can't win in a policy environment stacked
against us. Our efforts can still be defeated by unwise Federal
policies--especially unwise trade policies.
Because I have been very deeply involved in sales and marketing, I
have visited companies throughout the Midwest. I know firsthand that in
the globalized American economy many of these firms have had to
continually reinvent themselves with new technologies, new management
techniques and new business models. Many of these dynamic businesses
have been very successful; others have not.
My hometown and region also understand that local and state
government policies can be crucial to the health of their manufacturing
bases. Our recent economic difficulties have sparked a major burst of
community development initiatives and coalition-building involving
business, the public sector, and the nonprofit sector. Manufacturers in
Ohio, and particularly northern Ohio, know that they need to be
proactive doers and big-picture thinkers. We are not sitting around
idly waiting for protection.
Nevertheless, our efforts must be complemented with major changes
at the Federal level, and nothing is more essential than an overhaul of
Washington's approach to a broad range of international trade-related
issues. The U.S. role in the global economy is Washington's
responsibility--especially because we live in a world in which foreign
governments fight hard for the interests of their businesses and have
no reluctance to use all the resources and influence at their disposal
to get this job done. Indeed, under the Constitution, the right to
regulate foreign commerce rests with the Congress. Thank you for taking
that responsibility seriously at this Committee.
The needed overhaul of U.S. trade policy has to reflect the
interests of domestic businesses, which are too often absent from
policy deliberations in Washington, D.C. If new U.S. trade policies
don't actually change trade flows by changing the conditions companies
like mine face both at home and abroad, they won't bring us a dime's
worth of new business, they won't create or preserve a single new
American job, and they won't raise the wages or benefits of a single
American worker.
Has ``free trade'' worked for Ohio and for Ohio manufacturing? It's
impossible to look at my state's economy and say ``Yes.'' The latest
Census data tell us that, as of 2004, Ohio was the Nation's third
largest producer of goods. But in the 7 years prior to 2004, goods
production in our manufacturing-heavy state dropped nearly 9 percent in
real terms--the worst performance in the country and the fourth worst
in percentage terms.
Between 1997 and 2006, Ohio lost more than 22 percent of its total
manufacturing jobs and nearly 25 percent of its jobs in durable goods
industries. The latter still account for nearly 70 percent of the
state's manufacturing employment, and they pay among the state's best
wages--as they do nationwide. That's surely why wages in the state's
goods-producing sector overall--which paid more than 24 percent better
than the service sector according to the latest figures--fell 15.7
percent from 1997 to 2005--the worst performance in America.
Why do I blame ineffective U.S. trade policies? Clearly, they're
not the only factor. But I look at the recent trade performance of some
of the manufacturing sectors that are among Ohio's biggest, and it's
difficult to ignore the very strong connection. For example, between
1997 and last year, the U.S. trade deficit for durable goods industries
increased by nearly 260 percent. In transportation equipment, it grew
by nearly 155 percent. In fabricated metals--my sector--it exploded by
more than a factor of 10. In non-electrical machinery, America ran a
surplus of $14.4 billion in 1997. By last year, that had turned into a
deficit of $11.9 billion.
The net effect of these figures means fewer opportunities for sales
abroad and often reduced sales at home. An even clearer picture of the
damage comes from research on import penetration in U.S. manufacturing
industries that has been published in recent years by the U.S. Business
and Industry Council. Import penetration is an economist's way of
saying how much of the U.S. home market is being taken away from
domestic manufacturers and captured by foreign imports.
The Council has looked at how much of the U.S. market has been won
by imports over the last 10 years in over 100 categories. It's not a
pretty picture.
An astonishing 96 percent of these sectors--which are all capital-
and technology-intensive industries--lost U.S. market share to imports
during this period. That's the market they're supposed to know best.
That's the market where they face no trade barriers. In literally
dozens of cases, import penetration at least doubled. In dozens of
cases, moreover, imports now control more than half of the U.S. market.
Among the biggest so-called ``loser industries'' are sectors such as
aircraft engines and parts, machine tools of all kinds, and power
generation equipment.
These sectors represent the heart of the industrial economy of any
high-income country in the 21st century. They generate
disproportionately large gains in productivity, and technological
advance. They employ most of our country's knowledge workers. And they,
of course, pay the best wages in the entire economy. A country that
loses its dominance in these industries is like an athletic team that
sits back and watches its star players bought by rival teams willing to
offer better packages and conditions. The U.S. is also going to be a
country that will face major struggles to remain an economic and
military superpower.
These points describe some of the microeconomic problems caused by
our trade policies. But we should not forget the macroeconomic threats.
As a businessman, I can't help but be worried by the American economy's
rapid accumulation of titanic debts--so much of them resulting from
decades of buying from the rest of the world much more than we sell.
I have a hard time believing that the rest of the world is going to
continue funding our over-consumption--especially as we become ever
less creditworthy, at least by normal financial standards. I would feel
a lot better about the prospects for my business and my industry--and
the Nation at large--if I didn't know that the dollar could easily
collapse if just a few foreign central banks started hedging their bets
and reducing their dollar holdings.
I really hope that we can avoid the kind of worldwide economic
meltdown that would result. Like most of you I suspect, I am puzzled as
to how long the Nation can keep tempting fate.
I also keep hearing and reading that I shouldn't be concerned about
the loss of U.S. manufacturing jobs because it's a sign of soaring
productivity. I don't see any correlation between productivity gains
and the loss of factories and jobs. Some of our best-run companies are
now starting to disappear.
And as a businessman, I find myself wondering exactly who is going
to buy most of the products that the world's factories keep turning
out, if not the American consumer? Unless we keep going deeper into
debt, how can we as a nation keep up the pace if high-paying
manufacturing jobs keep getting replaced by much lower-paying service
jobs?
Are the American customers for the products I help make really
going to be replaced by Chinese or Indian customers--on anything close
to a one-for-one basis? And if so, with trade deficits continually
rising at this point, how long is this going to take?
But how exactly has trade policy contributed to these problems? I'd
like to focus on two features of this policy. First, as I indicated
before, foreign governments intervene in trade flows all the time, in
countless ways. They erect tariff and non-tariff barriers to protect
their own industries. They heavily subsidize producers on their home
soil, including with Value-Added Tax rebates on exports that have grown
in recent decades as tariffs have been cut. They manipulate their
exchange rates. They steal intellectual property. And they dump
products in our market at below the cost of production in their home
market.
What's most important to understand, however, is that our trade
problems are not limited to one high-profile sector--like steel. And
they aren't limited to one problem country--like China. Increasingly,
these practices represent the way business is done all around the
world, throughout the manufacturing sector, with one major exception--
the United States. And what our trade policy has done for way too long
has been to open our market wide to producers enjoying these
advantages--which of course include multinational companies that
produce overseas--and then tell our domestic firms, which manufacture
and create economic benefits here: ``You're on your own. Lots of
luck.''
Second, recent Presidents and their trade negotiators keep picking
the wrong target countries to sign trade deals with, at least from the
standpoint of strengthening manufacturing at home. Just think of the
countries and regions that have dominated U.S. trade diplomacy for
nearly 20 years--where we've signed the most deals: Mexico, China, The
Caribbean Basin, Central America, Sub-Saharan Africa, Jordan, and more
recently, Panama, Colombia, and Peru. Even the current Doha Round of
world trade talks aims explicitly at delivering most of the benefits of
expanded, freed-up trade to developing countries.
Signing trade deals with these countries and regions may be
justified--if the main purpose of trade policy is to create new
opportunities for foreign workers and companies. Or if the main purpose
is bolstering U.S. national security and fighting global terrorism by
aiding populations that might be receptive to the pitch of violent
extremists. (Incidentally, both of the above assumptions are open to
serious questioning.) However, if the central goals of U.S. trade
policy are creating more export opportunities for domestic companies
and raising the standard of living of their employees, then our aim is
completely cockeyed.
In fact, one of my own Senators, Sherrod Brown, has come up with
the most convincing explanation for this set of trade deal targets. As
he points out in the case of China, when American multinational
companies look at the People's Republic, they don't mainly see a
billion potential new customers. They see a billion potential new
workers. And by extension, the main markets that the U.S.
multinationals want to export product to are not abroad. They're at
home.
So I agree with those who argue that it's completely misleading
even to describe most recent trade agreements as free trade
agreements--because the aim can't be to create sustainable two-way
flows of business. Our target countries are either too small or too
poor or too deeply in debt or too protectionist and export-oriented to
become big new consumers of American-made products for the foreseeable
future.
But they have tremendous capability and potential to supply the
U.S. market--especially when our multinational companies provide them
with the world's most advanced production technologies and equally
advanced management techniques. As a result, it's best to describe
these deals as outsourcing or offshoring agreements. Their main purpose
is not to expand the worldwide sales of domestic American producers.
Instead, it's to help multinational companies serve the U.S. market
from very low-cost, regulation-free production platforms abroad.
Trade deals such as these--signed with regions with vastly more
export than import potential--can't help but tremendously boost the
U.S. trade deficit. And they can't help but place domestic producers
under ever more pressure--pressure that often has little or nothing to
do with free market forces--much less ``free trade.''
What should Congress do about this? I worded this question
deliberately--because the ball is squarely in Congress' court. After
more than 6 years under the current administration, it is clear that
the White House thinks that ``more of the same'' trade policies will
somehow produce different results. Thus the Administration can't be
counted on to be part of the solution.
As a result, it's gratifying to see so many Senators and Members of
Congress these days vigorously discussing the need to make big changes
in U.S. trade policy. I am very pleased, Mr. Chairman, that you have
introduced legislation to bring our imports and exports into line with
an auction quota system--an ambitious, sweeping plan that acknowledges
implicitly that piecemeal solutions to these trade problems will never
suffice. I was also very pleased by the emphasis that the Senate and
House Democratic freshmen have recently placed on new trade policies
that reflect the needs of domestic businesses.
Enhancing worker rights and environmental protections around the
globe are worthy and appropriate objectives for trade policy. Mr.
Chairman, your leadership on these issues is greatly appreciated. It is
important that the Congress hold firm in current negotiations with the
Bush Administration requiring strong and enforceable protections for
workers and for the environment in new trade agreements.
Yet from the perspective of domestic companies and industries--the
ones that actually generate jobs and wealth and income here at home--
these issues cannot be the main focus of changing current trade policy.
Leveling the playing field for companies such as mine by changing the
trade flows so that we turn the corner and begin to eliminate the trade
deficit needs to be the central policy objective.
What else is needed to assist the domestic manufacturers--and
service providers and farmers and ranchers--that make up the vital
productive side of our economy?
It's obvious that the first step is to stop doing harm. The trade
agreements that the United States negotiates and signs no longer
promote more production and employment at home than they send abroad.
We as a nation urgently need to figure out how to do trade policy right
again. As a result, I recommend that there be a moratorium on all new
trade agreements until major, pro-domestic producer and worker trade
strategies are identified and put in place. Congress might consider
appointing a broad-based national commission to carry out this mission.
For similar reasons, Congress should reject new Fast Track
authority for the Executive--until we have in place trade policies that
stop the hemorrhaging of manufacturing plants, R&D facilities, and the
high-paying/good benefit jobs associated with them. Nationally, since
2001, we have lost more than three million manufacturing jobs. Stemming
this erosion of jobs, skills, and our industrial base ought to be the
first objective of any new national trade policy.
In addition, Congress should:
Swiftly pass the Ryan-Hunter currency manipulation bill--
which already enjoys wide, bipartisan support. This legislation
would allow trade remedy law action against foreign government
manipulation of currency that is designed to keep their values
artificially low.
Address the unfair advantage caused by the rebate of VAT
taxes by over 150 of our trading partners. To do so, Congress
must pass a border equalization tax. This tax would apply to
foreign goods from VAT countries coming into our market. They
would be taxed at the same amount as the rebate they received
upon leaving the foreign country. We should then use the
proceeds to pay the VAT tax faced by American exports entering
foreign markets. This step would go far toward creating a fair
and level playing field for U.S. goods and services.
Institute major legislation to begin to reduce the trade
deficit. The approach could be an import quota and auction
system as recommended by Chairman Dorgan or it could be a
trade-balancing, temporary import surcharge as proposed by Rep.
Mike Michaud. These approaches, both of which could be designed
to be consistent with WTO rules, would rapidly get the trade
deficit under control. In addition, they would save the world
trade system as a whole, which is dangerously out of balance
today. Countries cannot get rich by exporting over-production
to the Untied States indefinitely.
Many other things need to be done, not only in trade policy, but in
related tax and regulatory policies. These measures that I have just
highlighted, however, represent an essential starting point. Their
passage would put the Congress strongly on record in support of a
program that supports domestic manufacturers and their employees.
If these measurers were turned into U.S. policy, they would go a
long way to allowing domestic businesses the chance to compete on a
fair and equal basis with their foreign counterparts.
Thank you for your consideration of my views. I look forward to
answering any questions that you might have.
Senator Dorgan. Mr. Johnston, thank you very much. Next
we'll hear from Christopher Wenk, a Senior Director for
International Policy at the U.S. Chamber of Commerce. Mr. Wenk,
thank you.
STATEMENT OF CHRISTOPHER WENK, SENIOR DIRECTOR, INTERNATIONAL
POLICY, U.S. CHAMBER OF COMMERCE
Mr. Wenk. Good morning. Chairman Dorgan, Ranking Member
DeMint, thank you for inviting the U.S. Chamber of Commerce to
testify today at this hearing on current U.S. trade policy. My
name is Christopher Wenk and I serve as the Senior Director for
International Policy at the U.S. Chamber, the world's largest
business federation.
Without question, free trade has been one of the
cornerstones of our economic successes as a nation. Is free
trade working, you ask? Absolutely.
Let's consider the following facts. America's international
trade in goods and services accounts for roughly 27 percent of
our country's GDP. Nationwide, our exports directly support 12
million good paying jobs and indirectly support millions of
other jobs. Imports keep inflation low and expand consumer
choice and quality.
More than 57 million Americans are employed by businesses
that engage in international trade and the benefits reach every
state in the Nation, including South Carolina and North Dakota.
The combined benefits of NAFTA and the Uruguay Round Trade
Agreement that created the WTO have increased U.S. national
income by $40 to $60 billion a year. The combined effects of
trade agreements over the past half-century have raised the
annual income of the American household by $10,000. About 97
percent of U.S. exporters are small or medium sized companies,
which create three out of four new jobs.
Having said all of the above, it is also important to
highlight a fact that is surely not well known by members of
this Committee and everyday Americans. The U.S. market is
already very open. Seventy percent of our imports face no
barriers whatsoever and the average U.S. tariff on remaining
imports is very low, at less than 2 percent.
The Chamber believes that the time has come for foreign
countries to cut their barriers down to match our already low
level. That's why we support trade liberalization, both
multilaterally and bilaterally.
Because our market is so open, free trade agreements
negotiated by the United States truly do level the playing
field for farmers, ranchers, manufacturers, service providers,
and workers. For example, over the 12 years since
implementation of NAFTA, U.S. exports to Canada and Mexico have
surged by well over $200 billion, sustaining literally millions
of new jobs and businesses. Since the U.S.-Chile FTA was
implemented on January 1, 2004, it immediately began to pay
dividends. In fact, U.S. exports to Chile nearly doubled in its
first 2 years.
The U.S. trade surplus with Singapore nearly quadrupled
over the first 2 years of implementation of that FTA. In the
first year of the U.S.-Australia free trade agreement, U.S.
exports to Australia grew by $1.6 billion, helping the United
States maintain an $8.4 billion goods trade surplus.
In 2006, U.S. exports to Central America and the Dominion
Republic rose by an impressive 16 percent. The U.S. recorded a
trade surplus of $1 billion with these countries in 2006,
compared with a deficit of $1.6 billion in 2005.
Today, just under half of American exports go to markets
where they enter duty free, thanks to these FTAs. In fact, our
exports to FTA partners are growing twice as fast as our
exports to the rest of the world. Further, the Chamber supports
prompt Congressional action on the FTAs recently concluded with
Peru, Columbia, Panama and Korea, pending a successful
conclusion to the ongoing negotiations between the Hill and the
Administration.
In a little more than 60 days, the President's trade
negotiating authority will expire. Renewal of this authority is
critical to enable the United States to continue having a seat
at the table negotiating world buy markets. Without this
authority, the United States will be left on the sidelines as
other nations negotiate bilateral and regional trade deals
without us, as happened after TPA lapsed in 1994. Without it,
no foreign government will engage in serious trade negotiations
with the United States and the Doha Development Agenda will not
be able to unleash its true potential. Failure to renew the
President's trade negotiating authority would deny U.S. trade
negotiators a vital tool and risk letting America fall behind
in the global economy.
Regardless of who wins the 2008 elections, the next
President should have the authority to negotiate market opening
trade deals in consultation with Congress.
The opportunities trade presents are clear but there are
challenges as well. In recent years, Congress has engaged in a
dialogue about how to ensure that U.S. workers and workers in
developing countries could benefit from increased trade
investment flows. The U.S. business community encourages these
discussions as well as efforts to provide American workers with
the tools they need to raise their productivity.
We welcome new ideas on ways to improve the Trade
Adjustment Assistance Program and we hope that Congress will
also consider new programs that will assist American workers.
If U.S. companies, workers and consumers are to thrive
amidst rising competition, new trade agreements such as the
Doha Round and the various FTAs I cited before are absolutely
critical.
I would leave you with some interesting remarks that
Treasury Secretary Hank Paulson gave to the Economic Club of
Washington recently on the subject of trade--the case for trade
is clear and compelling and if we want more people to support
it, we need to ease anxieties and help more people realize the
benefits of trade. The alternative, raising protectionist
barriers and isolating ourselves from the gains of trade would
hurt the economy. The long-term costs of protectionism, for us
and the rest of the world is lost jobs and lost opportunity.
Thank you.
[The prepared statement of Mr. Wenk follows.]
Prepared Statement of Christopher Wenk, Senior Director,
International Policy, U.S. Chamber of Commerce
On behalf of the U.S. Chamber of Commerce, I am pleased to appear
before the Senate Commerce Subcommittee on Interstate Commerce, Trade
and Tourism to provide testimony on how trade is working for the U.S.
economy. International trade plays a vital part in the expansion of
economic opportunities for American workers, farmers, and businesses.
As the world's largest business federation--representing more than
three million businesses and organizations of every size, sector, and
region--the U.S. Chamber views efforts to expand trade opportunities as
squarely in the interests of America's workers, farmers, consumers, and
companies.
As such, the Chamber has helped lead the business community's
effort to make the case for initiatives to expand trade, including
global trade negotiating rounds under the purview of the World Trade
Organization (WTO) and its predecessor, the General Agreement on
Tariffs and Trade, as well as bilateral and regional free trade
agreements (FTAs). The Chamber does so because U.S. businesses have the
expertise and resources to compete globally--if they are allowed to do
so on equal terms with our competitors.
Trade, Growth, and Prosperity
The facts show that while some are hurt--and should be helped--the
overwhelming majority of Americans derive great benefits from
international trade and investment. America's international trade in
goods and services accounts for roughly 27 percent of the country's
GDP. As the Office of the U.S. Trade Representative has pointed out,
the combined effects of the North American Free Trade Agreement (NAFTA)
and the Uruguay Round trade agreement that created the WTO have
increased U.S. national income by $40 billion to $60 billion a year. In
addition, the lower prices for imported goods generated by these two
agreements mean that the average American family of four has gained
between $1,000 and $1,300 in spending power--an impressive tax cut,
indeed.
When Trade Promotion Authority (TPA) lapsed in 1994, the
international trade agenda lost momentum. The Uruguay Round was
implemented, but no new round of global trade negotiations was launched
as the 1990s wore on. Moreover, the United States was compelled to sit
on the sidelines while other countries and trade blocs negotiated
numerous preferential trade agreements that put American companies at a
competitive disadvantage.
As the Chamber pointed out during its 2001-2002 advocacy campaign
for approval of TPA, the United States was party to just three of the
roughly 150 FTAs in force between nations at that time. Since then, the
United States has approved FTAs with an additional dozen countries, and
they are bringing substantial economic benefits. Today, just under half
(43 percent) of American exports go to markets where they enter duty
free thanks to these FTAs. Only a third of U.S. exports enjoyed this
advantage back in 1994, the year NAFTA came into force. With sales to
our newest FTA partners growing twice as fast as U.S. export growth to
the rest of the world; it's no surprise that U.S. exporters are
enjoying robust growth.
Free Trade Agreements
As noted above, the United States is an extraordinarily open
economy. Consider how U.S. tariffs compare with those of countries
where FTA negotiations have recently been concluded or are underway.
According to the World Bank, the United States has a weighted average
tariff rate of less than 2 percent. By contrast, the weighted average
tariff on U.S. manufactured goods falls in the 10-11 percent range in
Colombia, Korea, and Peru.
An academic observer may regard the price disadvantage that falls
to U.S. companies from these lopsided tariffs as insignificant.
However, business men and women face narrower margins than these every
day, very often with the success or failure of their firm on the line,
so these tariffs can prove decisive. Best of all, a free trade
agreement can fix this imbalance once and for all.
The way FTAs level the playing field for U.S. workers, farmers, and
business is borne out in the results attained by America's FTAs. For
example, the U.S.-Chile FTA was implemented on January 1, 2004, and
immediately began to pay dividends for American businesses and farmers.
U.S. exports to Chile surged by 33 percent in 2004, and by a blistering
85 percent in 2005. In fact, U.S. exports to Chile nearly doubled in
the first 2 years of the agreement's implementation.
Other recent FTAs have borne similar fruits. Trade with Jordan has
risen four-fold since the U.S.-Jordan FTA was signed in 2000, fostering
the creation of tens of thousands of jobs in a country that is a close
ally of the United States. The U.S. trade surplus with Singapore nearly
quadrupled over the first 2 years of implementation of the U.S.-
Singapore FTA (2004-2005). And over the 12 years since implementation
of the North American Free Trade Agreement (NAFTA), by far the largest
and most important of these agreements, U.S. exports to Canada and
Mexico have surged by well over $200 billion (to a total of
approximately $375 billion in 2006), sustaining literally millions of
new jobs and businesses.
One of the most compelling rationales for these FTAs is the benefit
they afford America's smaller companies. The following table reveals
how America's small and medium-sized companies are leading the charge
into foreign markets, accounting for more than three-quarters of
exporting firms to these three selected markets (one a market where an
FTA was recently approved, the second where FTA negotiations were
recently concluded, and the third where an FTA has just been proposed).
As a corollary, it suggests how smaller businesses stand to gain
disproportionately from the market-opening measures of a FTA:
------------------------------------------------------------------------
No. of U.S.
companies No. of U.S. SMEs No. of U.S. SMEs
Market exporting to the exporting to the as a percentage
market market of exporters
------------------------------------------------------------------------
DR-CAFTA 16,640 14,693 88
countries
------------------------------------------------------------------------
Peru 5,519 4,403 79
------------------------------------------------------------------------
Korea 18,339 16,237 88
------------------------------------------------------------------------
Source: U.S. Department of Commerce, 2004 data (latest available).
Beyond the highly successful track record of America's FTAs as
measured in terms of new commerce, the Chamber and its members also
support FTAs because they promote the rule of law in emerging markets
around the globe. This is accomplished through the creation of a more
transparent rules-based business environment. For example, FTAs include
provisions to guarantee transparency in government procurement, with
competitive bidding for contracts and extensive information made
available on the Internet--not just to well-connected insiders.
FTAs also create a level playing field in the regulatory
environment for services, including telecoms, insurance, and express
shipments. In addition, recent FTAs have strengthened legal protections
for intellectual property rights in the region, as well as the actual
enforcement of these rights.
Following are observations on some of the trade agreements that
have been in the headlines lately:
Peru, Colombia, Panama: Negotiations for the Peru Trade Promotion
Agreement were concluded in December 2005, and a similar agreement was
reached with Colombia a few months later. In December 2006, the U.S.
and Panamanian governments announced they had completed negotiations on
a Trade Promotion Agreement ``with the understanding that it is subject
to further discussions regarding labor,'' according to the Office of
the U.S. Trade Representative.
U.S. trade with Peru, Colombia, and Panama has nearly doubled since
2000, and U.S. commerce with the three countries last year totaled $8
billion, $15 billion, and $3 billion, respectively. These are ambitious
and comprehensive agreements. Eighty percent of U.S. consumer and
industrial products and a majority of the most competitive U.S. farm
exports will enter these markets duty-free immediately upon
implementation of the agreements.
U.S. investors in these countries also regard the Trade Promotion
Agreements as a helping hand for close allies. As described above, the
agreements will lend support for the rule of law, investor protections,
internationally recognized workers' rights, and transparency and
accountability in business and government.
The agreements' strong intellectual property and related
enforcement provisions against trafficking in counterfeit or pirated
products will help combat organized crime. The agreements will promote
economic growth, lending strength to the regional economy and providing
local citizens with long-term alternatives to narcotics trafficking or
illegal migration.
The Chamber is serving as Secretariat of the Latin America Trade
Coalition, a broad-based group of U.S. companies, farmers, and business
organizations advocating for approval of the three Trade Promotion
Agreements.
Korea: The Chamber also strongly supports the recently concluded
U.S.-Korea FTA, which is the most commercially significant FTA the
United States has entered into since NAFTA. In 2006, Korea was the
United States' seventh-largest U.S. trading partner, seventh-largest
export market, and its sixth-largest agricultural market overseas. U.S.
goods exports to Korea totaled $32.5 billion last year, an increase of
17 percent over the previous year, and U.S. services exports to Korea
reached $10.2 billion in 2005. The United States is the largest
investor in Korea and is Korea's second-largest market.
While we look forward to reviewing the text of the U.S.-Korea FTA
as it becomes available, we have been briefed on its substance and
believe that the agreement achieves most of the business community's
key objectives. Under the agreement, 95 percent of trade in consumer
and industrial products and more than half of current U.S. agricultural
exports to Korea will become duty free upon implementation of the
agreement. This agreement will eliminate significant non-tariff market
access barriers in Korea to U.S. goods, services, and investment, and
it includes robust provisions on transparency, intellectual property
rights, competition, and other rules that will protect U.S. interests.
Moreover, the agreement would also strengthen the important political
relationship and alliance between the United States and Korea, further
contributing to security and stability in the Asia-Pacific region.
The Chamber-administered U.S.-Korea Business Council is serving as
Secretariat of the U.S.-Korea FTA Business Coalition. This coalition
already embraces over 200 leading U.S. companies and business
associations that strongly support the conclusion and passage of a
U.S.-Korea FTA to advance the interests of the U.S. business community
and promote further bilateral trade and investment.
Malaysia: When U.S. and Malaysian officials announced in March 2006
that the two countries would undertake negotiations for a FTA, the
initiative won immediate broad support. Malaysia is the largest U.S.
trading partner in Southeast Asia and the 10th largest U.S. trading
partner in the world. Two-way trade between the countries in 2005
surpassed $44 billion. The United States is Malaysia's largest export
market, purchasing more than 20 percent of Malaysia's exports, and the
sum of U.S. direct investments in Malaysia surpasses that of any other
country. Unfortunately, this agreement will not be concluded under the
current Trade Promotion Authority (TPA).
The Doha Development Agenda
While the FTAs the United States has negotiated represent an
ambitious and comprehensive way to open markets one country or region
at a time, the Doha Development Agenda (DDA)--the global trade
negotiations currently being conducted under the aegis of the World
Trade Organization--offers the remarkably broad opportunity to lower
barriers to trade globally. By leveraging both the breadth of the DDA
and the depth of FTAs, U.S. business can attain important new market
opportunities in the years ahead.
In essence, the DDA represents a unique opportunity to unlock the
world's economic potential and inject new vibrancy in the global
trading system by reducing barriers to trade and investment throughout
the world. The round was launched on the premise that both developed
and developing nations alike share in the economic gains resulting from
global trade liberalization, particularly by addressing unfinished
business in the agricultural sector.
Ambition is the key to the DDA's success. As one of the most open
economies in the world, the United States must be ambitious in its
approach to liberalization of trade in manufactured goods, services,
and agricultural products if we are to convince our more reluctant
trading partners to share our goals. Of course, we cannot lead alone.
The European Union and the G20, in particular, need to demonstrate that
they, too, are committed to the success of the DDA and willing to make
the concessions necessary for a balanced result that can win the
support of all WTO member countries.
The Chamber and its member companies are working with the
Administration, Congress, and their counterparts around the world to
ensure that the negotiations advance. On October 25, 2005, the Chamber,
in partnership with other leading U.S. business organizations and a
broad range of companies and agricultural groups, launched the American
Business Coalition for Doha (ABC Doha) to ensure that the U.S. private
sector is coordinated, mobilized, and focused on achieving success in
the DDA. The recommendations that follow represent the Chamber's
priorities for the DDA, and we will be working actively with our
trading partners around the world in the weeks and months ahead to
build support for the objectives set out below.
Trade in Agricultural Products: In 2001, the WTO member countries
committed to making ``substantial improvements in market access;
reductions of, with a view to phasing out, all forms of export
subsidies; and substantial reductions in trade-distorting domestic
support.'' We are encouraged that last fall's proposals set forth by
the United States and the G20 seem to have re-energized negotiations
with respect to agricultural reforms. We hope these advances will stem
what we had perceived before the 6th WTO ministerial conference in Hong
Kong last December to be an emerging lack of ambition on the part of
some key parties to the negotiations.
In a World Bank paper, Kym Anderson concludes that 92 percent of
developing countries' gains in agricultural trade will come from
reductions in market access barriers. The paper finds that such tariff
reductions will not only improve the trade climate between developed
and developing nations, but more importantly will yield significant
gains in trade among and between developing countries. This outcome
mirrors what we have witnessed in improved market access provisions in
the areas of manufactured goods and services--the most robust gains are
seen in trade among and between developing nations.
The United States is uniquely positioned to press for success based
on the highest levels of ambition. Bold positions can help break what
appears to be a stalemate between developed and developing countries
over who should make the first move. We cannot fail to deliver steep
reductions in both trade-distorting domestic supports and tariff rates.
In the end, success will only be achieved through mutual recognition
that comprehensive trade liberalization is an opportunity that will
yield enormous benefits to farmers and consumers worldwide.
Trade in Manufactured Goods: Manufactured goods represent 75
percent of global merchandise trade, and the manufacturing sector is a
strong driver of U.S. economic growth and employment. In 2001, the WTO
member countries made a commitment ``to reduce or as appropriate
eliminate tariffs, including the reduction or elimination of tariff
peaks, high tariffs, and tariff escalation, as well as non-tariff
barriers, in particular on products of export interest to developing
countries.'' While some progress has been made toward this goal, much
work remains to be done in the non-agricultural market access (NAMA)
negotiations.
In order to deliver on its development promises, the DDA must
provide genuine new market access by substantially reducing or
eliminating tariffs among, at minimum, the developed and developing
countries through a formula that focuses on making meaningful
reductions in tariffs across all product segments, particularly peak
and high tariffs. A final agreement must also allow for a voluntary
sectoral approach to tariff elimination. Above all, achieving a ``level
playing field'' requires an approach that recognizes the current
differences among countries' tariffs, and mandates reductions in
tariffs that will reduce and eliminate those differences, so as to
avoid an outcome where countries with high average tariffs are only
required to make relatively small reductions.
While tariff elimination is a critical component of the round, non-
tariff barriers are increasingly becoming as important, if not more
important, as tariffs in constraining global trade. The DDA should
focus on removing these hindrances to international trade, using both
horizontal and sectoral approaches. In addition, the WTO should
strengthen, or create where necessary, problem-solving mechanisms
specifically focused on addressing and removing non-tariff barriers.
In order to ensure that the NAMA negotiations lead to substantially
increased opportunities for trade, growth, and development for all
countries, flexibilities should be built into the process that can
provide some room for less developed and small economies to take part
without shouldering the same burden as their more developed
counterparts.
Finally, the Chamber recognizes that the NAMA negotiations are
impacted by progress in the broader negotiating environment. It is
important that negotiations on agriculture, services, and NAMA move
forward on parallel tracks to ensure that success in the broader round
is achieved.
Trade in Services: The services sector is the backbone of the
economy in developed and developing countries alike. In total, it
represents about two-thirds of world GDP, or $35 trillion in 2004.
Further liberalization of this critical sector will allow WTO member
countries to attract greater foreign direct investment and take full
advantage of the growth and employment that this vital sector provides.
In 2001, the services liberalization work that had been conducted
under the General Agreement on Trade in Services (GATS) was
incorporated into the DDA mandate. WTO members endorsed the existing
negotiating modalities and set a schedule for successive market access
requests and offers. Progress has been unsatisfactory to date: few
offers and even fewer revised offers have been tabled, despite the fact
that the May 2005 deadline is long passed. While new methods that hold
promise are being explored to revitalize the process, the objective of
achieving substantial new liberalization commitments within the next
few months should guide U.S. efforts.
In mode one (cross border supply of services), the U.S. should seek
full market access and most-favored nation (MFN) treatment for all
cross border services trade. This level of ambition should apply for
mode two (consumption of services abroad) as well. In mode three
(commercial presence), the U.S. should seek the abolition or, at the
very least, substantial easing in equity limits for services
investments and allow for the incorporation of services businesses in
whatever legal form makes the most business sense. In mode four
(temporary movement of professionals), countries should commit to
screen temporary workers, ensure they will leave when their visas
expire, and generally commit to containing illegal migration in return
for their professionals' access to host countries.
Trade Facilitation: The Doha Declaration recognizes the case for
``further expediting the movement, release and clearance of goods,
including goods in transit, and the need for enhanced technical
assistance and capacity building in this area.'' Trade facilitation
initiatives provide significant opportunities to achieve real, nuts-
and-bolts improvements for businesses of all sizes. Progress in such
areas as port efficiency, customs procedures and requirements, the
overall regulatory environment, and automation and e-business usage are
important for all companies but are especially valuable to smaller and
medium-sized enterprises.
Major world regions are already embracing trade facilitation. In
2002, the 21 member economies of the Asia-Pacific Economic Cooperation
(APEC) forum launched a Trade Facilitation Action Plan that included a
commitment to reduce trade-related transaction costs by 5 percent
within 6 years. In November 2004, the APEC leaders were proud to
announce that they had reached their goal 3 years ahead of schedule.
And in the Western Hemisphere, the countries negotiating the Free Trade
Area of the Americas committed in 1999 to implement a package of nine
customs-related ``business facilitation'' measures that covered much of
the same ground as the APEC action plan. In November 2005, a group of
over 100 of the Western Hemisphere's leading business organizations
released a declaration favoring an ambitious stance in the trade
facilitation negotiating group of the DDA.
These efforts have served to raise the profile of trade
facilitation as an opportunity for the DDA, but much more can be done.
Trade facilitation can bring great benefits if adopted unilaterally,
but a global rules-based approach also offers the advantages of
certainty, stability, and enhanced commonality to customs measures and
port administration. This is the promise of the DDA's trade
facilitation negotiations.
Trade, Labor and Workforce Development
The opportunities trade presents are clear, but there are
challenges as well. In recent years, Congress has engaged in a dialogue
about how to ensure that U.S. workers and workers in developing
countries can benefit from increased trade and investment flows. The
U.S. business community encourages these discussions as well as efforts
to provide American workers with the tools they need to raise their
productivity. The Chamber welcomes new ideas on ways to improve Trade
Adjustment Assistance programs, and hopes that Congress will also
consider new programs that will assist American workers in remaining
competitive and highly productive.
In addition to the benefits for the United States, there is
powerful evidence that deepening economic ties with developing
countries promotes their growth, fosters job creation, and promotes
improvements in worker conditions in markets where American companies
are active and engaged. Numerous studies show that American companies
operating in foreign markets lead the way in driving improvements in
working conditions and act as stellar examples of responsible corporate
citizens. U.S. companies promote ethical and responsible business
behavior, market-oriented business practices, and respect for the rule
of law. They also operate under high environmental, health and safety
standards in developing country markets, and they encourage local
suppliers to adopt and adhere to similar practices. Compared to
employees in local companies, employees in U.S. companies enjoy
competitive to superior compensation, benefits, and training.
The Chamber is hopeful that Congressional discussions with the
Administration on trade and labor will reflect the goals we all share
for promoting working conditions and creating jobs in developing
countries. The Chamber is optimistic that Congress will develop a way
forward on trade legislation that will enable the U.S. to continue to
pursue an active and engaged trade policy, opening markets to U.S.
goods, services, and agricultural products. The U.S. business community
stands ready to support those discussions on the way forward, and we
want to work in partnership with Congress and the Administration in
developing substantive, comprehensive strategies that will bolster
America's competitiveness and improve America's workforce.
Conclusion
The Chamber believes that trade expansion is an essential
ingredient in any recipe for economic success in the 21st century. To
make the case more clearly, the Chamber recently issued a landmark
report entitled Global Engagement: How Americans Can Win and Prosper in
the Worldwide Economy. It maps out the benefits of trade--as well as
challenges to America's ability to compete that have been laid bare by
globalization.
The Chamber also recently published Impact of Trade, which lays out
in the clearest fashion possible the benefits that the 50 states of the
union are already deriving from international commerce. The Chamber is
pleased to present these documents for the record, and they are
available on our website (www.uschamber.com) as well.
If U.S. companies, workers, and consumers are to thrive amidst
rising competition, new trade agreements such as the DDA and the
various FTAs cited above will be critical. In the end, U.S. business is
quite capable of competing and winning against anyone in the world when
markets are open and the playing field is level.
Mr. Chairman, Mr. Ranking Member, Members of the Committee, we
greatly appreciated the opportunity to testify today before Senate
Commerce Subcommittee on Interstate Commerce, Trade and Tourism to
provide testimony on the critical importance of advancing the U.S.
international trade agenda. The Chamber stands ready to work with you
on these and other challenges in the year ahead. Thank you very much.
Senator Dorgan. Mr. Wenk, thank you very much and finally
we will hear from Mr. Gresser. Edward Gresser is the Director
of the Trade and Global Markets Project of the Progressive
Policy Institute. Mr. Gresser, welcome.
STATEMENT OF EDWARD GRESSER, DIRECTOR, TRADE AND GLOBAL MARKETS
PROJECT, PROGRESSIVE POLICY
INSTITUTE
Mr. Gresser. Thank you very much, Senator. Thank you, Mr.
Chairman, Senator DeMint. Your question today, is free trade
working is a timely and very important one. The answer, of
course, depends on the goals we hope free trade or I would say,
freer trade because we don't have and the world doesn't have an
academic ideal of free trade.
The goals we hope this achieve--let me start there, noting
the mere remarks of personal observations and thoughts--not
formal positions of the PPI.
Our modern trade policy in the sense of negotiations with
foreign countries to reduce trade barriers rests on the
conclusions that President Franklin Roosevelt drew from the
collapse of trade between 1929 and 1931. He believed
disadvantage, sparked by a worldwide cycle of retaliations
beginning in the U.S. had deepened the Depression, closed
avenues of escape and ultimately helped to open politics to
radical nationalism in Europe and in Asia.
A 1936 speech given in Buenos Aries explains--this is
Roosevelt speaking: ``Every nation of the world has felt the
evil effects of recent efforts to erect trade barriers of every
known kind. Every individual citizen has suffered them. It is
no accident that the nations which have carried this process
furthest are those which proclaim most loudly that you require
war as an instrument of policy. It is no accident that because
of these suicidal policies and the suffering attending them,
many of their people have come to believe with despair that the
price of war seems less than the price of peace.''
At the end of the war in 1945, Roosevelt hoped that
reopening trade could do the same thing in reverse--could
restore growth, could create safeguards against a second crisis
and depression--ultimately, as he suggested in announcing the
first multilateral trade negotiations, which concluded in 1947,
give nations a greater stake in one another's security and
prosperity and help to create what he called the economic basis
for the secure and peaceful world we all desire.
Since then, the world has opened up. Policy is a big part
of it. We've had 12 major multilateral agreements, a string of
more recent bilateral agreements and preferences programs.
Powerful structural changes outside policy get less attention
but are equally important. These are geopolitical changes, with
reintestation of Germany and Japan and then Russia and China in
the global economy; container shipping and air cargo cut the
cost of goods trade; fiber optics, broadband, satellite beams
and the Internet are doing the same to create a global services
industry. Trade has accordingly grown fivefold relative to the
U.S. and world economies since the end of the war.
Is it working? This is the right question, I think. Taking
Roosevelt's hopes as a guide, on the whole, the answer is yes.
Open markets abroad let us sell $1.4 trillion in airplanes and
wine and high value commercial services and more to the world
last year.
Our own openness to imports, often a cause for anxiety and
stress, also raises living standards through wider choice and
better prices. And by keeping inflation low, it gives us lower
unemployment with higher growth.
This is not an academic theory. We can look back and see
that since the NAFTA and the creation of the WTO and the launch
of the World Wide Web in the early 1990s, American unemployment
has fallen from an average rate of 7.1 percent to 5.2 percent,
which is probably the longest stretch of sustained low
unemployment we've had in many, many years.
Overseas, an opening world economy has helped foster
development and to reduce poverty. Two recent cases that I
consider particularly important--one is the African Growth and
Opportunity Act, which has helped to create nearly 200,000 jobs
in low-income African states, like Lesotho, Swaziland, Kenya
and others.
Then there was trade normalization with Cambodia in 1996.
This has helped to create an urban manufacturing industry in
Phnom Phen that now employs 300,000 young women, has helped to
ease the threat of rural hunger as they send money back to
their families, and it has helped an almost destitute country
get back on its feet and play the role it should have in the
world economy today.
Most important, the crisis of the 1930s has never been
repeated and economic integration seems to be fulfilling its
hopes as a guaranteer of peace. No two great powers have come
into conflict since the 1960s, which is the longest such period
that I know of and a major study last year found wars rarer
than at any time since the 1820s, suggesting that this is in
part because the world is more open. To quote, ``an open global
trading regime means that is always cheaper to buy resources
from overseas than to use force to acquire them.''
The work is incomplete. Major markets remain closed or
partly closed to our exports. Some imaginative thinking could
make the trading system far more effective in promoting
environmental protection. Trade policy has largely missed the
greater Middle East and a bit more controversially, our own
policies have some flaws.
The tariff system, for example, is the most regressive of
all the major Federal taxes, with tariff rates on clothes and
shoes and some foods rising to 32 percent for acrylic sweaters
and 48 percent for cheap sneakers. As a tax and life
necessities, the tariff is toughest on poor families with
children and especially on single mothers. Abroad it is the
same.
Last year, Cambodia, which makes largely cheap clothes,
faced the same $370 million tariff penalty on $2.2 billion
worth of cheap clothes that France faced on $37 billion in
wines, medicines, airplane parts and other sophisticated goods.
Trade liberalization has brought powerful anxieties as
well. In some areas, though, these are misconceptions, which
need a calm rebuttal. The U.S. is not losing jobs overall.
Since the early 1990s, we've added 20 million and since the
1970s, 50 million private sector jobs. The U.S. is not de-
industrializing. Our manufacturing sector is growing and has a
stable real dollar share of the U.S. and global economies, nor
are factories fleeing en masse for poor countries, as U.S.
manufacturers invested $56 billion in foreign plants and
acquisitions last year. Foreign manufacturers invested $67
billion here.
The dismal experience of the shoe and clothing industries,
where job loss has been fastest of all, shows that preserving
trade barriers is no way to preserve jobs. In other areas,
anxieties can be well founded. Our trade and financial
imbalance, the balance since last year--problems need
attention. Low savings in the U.S., hyper saving and inflexible
currencies in some Asian countries, reliance on imported energy
with volatile prices.
As we face powerful new competitors in India and China, we
have competitive weaknesses at home in finance and support for
science and in some visa policies. And our social contract in
which the businesses are the main suppliers of health and
pension coverage, while government steps in mainly to support
the elderly and poor, is visible eroding as businesses recede
from this role.
Our new social contract must start fresh, not guaranteeing
jobs but using government supports, tax incentives, new rules
for unions and other measures to ensure that for people
affected by trade competition, domestic competition,
technology, change and recessions alike, layoffs and career
shifts no longer mean lost health insurance and pensions,
threats to college and mortgage payments and in a broad sense,
family catastrophe.
In summary, Mr. Chairman, the world is moving quickly. Some
American policies are no longer adequate and we need some
careful and ambitious thought in our finances, our
competitiveness and our safety net. But these problems are not
unsolvable and we can approach them with some confidence. And I
believe the basic goals Mr. Roosevelt set for trade policy--
open markets, growth, safeguard against global crisis, support
for peace, remain the right ones today. Thank you.
[The prepared statement of Mr. Gresser follows:]
Prepared Statement of Edward Gresser, Director, Trade and Global
Markets Project, Progressive Policy Institute
Chairman Dorgan, Senator DeMint, Members of the Subcommittee, thank
you for inviting me to testify before you today. By way of
introduction, I am Director of the Project on Trade and Global Markets
at the Progressive Policy Institute. PPI is a nonprofit think-tank
based in Washington, D.C., which conducts research and policy
development in areas ranging from trade and the global economy to
defense, foreign policy, health, energy and environment, social policy
and other issues. My testimony will reflect personal views and opinions
rather than any official views of the Institute.
Introduction
Today's hearing poses an interesting and important question: ``Is
`Free Trade' Working?'' In fact, neither the U.S. nor the world has
achieved an academic ideal of `free trade.' Sixty years of trade
liberalization, combined with technological change and logistical
innovation, has created a far more open and integrated world. Flows of
goods, services and ideas--into our country, out of it, and around it--
are larger than ever before, certainly in absolute terms and almost
certainly relative to the U.S. and global economies. But trade policy
has also exempted some industries and missed some important parts of
the world. A look at both the changes liberalization has brought, and
the experience of the industries and regions where trade has not been
liberalized, helps to shed some light on the Subcommittee's question.
Overall, as economic theory and foreign policy principles suggest,
the opening of the world economy has brought us many benefits. The
policies and technological advances that ease exchange of goods and
services have helped to raise living standards, allow American
businesses and farmers to serve larger markets, keep inflation and
unemployment low, and promote global growth and political stability. In
each of these areas more can be done. But the same policies and
technical changes can bring stress and anxiety, as new competitors
arise and workers and businesses feel sometimes intense pressure. Some
fears rest upon misconceptions that need calm and factual response. But
others are real and justified, reflecting problems that are not
insoluble but require us to reshape domestic policies related to
national competitiveness, improve adjustment programs and international
financial policy, and strengthen the national safety net through a new
``social contract'' to replace one now visibly outdated.
My testimony today will cover each of these topics, examining first
the original purposes of American trade policy; then the results it has
brought and the gaps it has left; and finally the stresses many
Americans now feel and policy options that might help.
Franklin Roosevelt and the Purposes of Trade Policy
An appropriate place to begin an evaluation of U.S. trade policy is
with its goals. Trade policy has many facets, from trade remedy laws to
export and investment promotion, intellectual property enforcement and
more. But its center, since approval of the Reciprocal Trade Agreements
Act in 1934, has been negotiations with foreign governments to reduce
trade barriers.
This is by now a very familiar approach to trade. In the 1930s it
was something of a radical innovation. Trade policy in the 19th and
early 20th century had revolved instead around legislative increases or
reductions of tariffs and other trade policy instruments, and the
approval of the RTA thus reflected the judgment of Franklin Roosevelt
and the 73rd Congress that this approach had gone badly wrong.
The impetus for their change of strategy was the collapse of trade
in the early years of the Depression. Convinced that America, as a
high-wage country, could not compete with lower-wage rivals in Europe,
China and Japan, the Hoover Administration had overseen a sharp
increase in tariffs in 1930, coinciding with the onset of the
Depression. Most foreign countries quickly retaliated. The worldwide
tariff hikes and retaliations, augmented by falling demand, cut U.S.
trade from $9.6 billion in 1929 to $2.9 billion by 1932, and total
world trade from $68 to $24 billion. Roosevelt and his contemporaries
believed the event had deepened the Depression and made it harder to
escape. As years passed, he concluded that it had helped discredit
liberal politics and encourage radical nationalism in Europe and Asia.
His address to the 1936 ``Inter-American Conference for the Maintenance
of Peace'' in Buenos Aires explains:
The welfare and prosperity of each of our Nations depend in
large part on the benefits derived from commerce among
ourselves and with other Nations, for our present civilization
rests on the basis of an international exchange of commodities.
Every Nation of the world has felt the evil effects of recent
efforts to erect trade barriers of every known kind. Every
individual citizen has suffered from them. It is no accident
that the Nations which have carried this process farthest are
those which proclaim most loudly that they require war as an
instrument of their policy. It is no accident that attempts to
be self-sufficient have led to falling standards for their
people and to ever-increasing loss of the democratic ideals . .
. It is no accident that, because of these suicidal policies
and the suffering attending them, many of their people have
come to believe with despair that the price of war seems less
than the price of peace.
Since then--especially since the end of the Second World War--the
principal focus of U.S. trade policy has been to reduce trade barriers.
Again one can quote from Roosevelt in a message sent to Congress in
March 1945. Announcing the opening of the first multilateral trade
negotiations, this defines the purposes of modern trade policy: to
encourage growth and rising living standards, create a set of rules and
binding agreements that would prevent a repetition of the 1929-1932
experience, and ultimately ``lay the economic basis for the secure and
peaceful world we all desire.''
Trade Liberalization 1945-2006
Each of the eleven succeeding Presidents has built trade policy on
this foundation. Over sixty years, their policies have joined
structural changes arising from geopolitics, technological change and
logistics to create a far more open world.
1. Trade Negotiations Since 1945
Trade negotiations have proceeded, with only a few gaps, since
Roosevelt's letter to Congress in 1945. A brief review of the record is
as follows:
GATT/WTO agreements: Since 1945, the U.S. has participated
in twelve multilateral agreements, including eight through the
General Agreement on Tariffs and Trade between 1947 and 1994
and then four at its successor, the modern WTO, in the late
1990s.\1\ Cumulatively, they have cut average tariffs by well
over 90 percent in rich countries--for the U.S., trade-weighted
tariffs have dropped from an average of 40 percent during the
Depression-era peak to about 2.0 percent, or to 1.4 percent
including the effects of free trade agreements negotiated over
the last 20 years--and abolished them altogether in industries
such as information technology, toys, scientific instruments,
and others. These agreements have also eliminated most quotas
and import licenses outside agriculture, eliminated most
industrial subsidies and limited subsidies in agriculture,
developed an international agreement on intellectual property;
created agreements on technical standards and government
procurement, begun liberalizing some services industries; and
invented a dispute-settlement system that has considered 361
complaints since the creation of the WTO in 1994.
---------------------------------------------------------------------------
\1\ The eight GATT agreements are the Geneva I Round in 1947, the
Annecy Round in 1949, the Torquay Round in 1951, the Geneva II Round in
1956, the Dillon Round in 1961, the Kennedy Round in 1967, the Tokyo
Round in 1979 and the Uruguay Round in 1994. The four WTO agreements
are the WTO's Information Technology Agreement in 1997, the Financial
Services Agreement in 1998, the Basic Telecommunications Agreement in
1998, and a ``duty-free cyberspace'' principle in 1999.
GATT/WTO membership expansion: Simultaneously, the trading
system has broadened as ``accession'' agreements added 127 new
members to the original 23 GATT founders. These have included
first Japan and Germany, then dozens of new countries emerging
from colonial rule, then the new democracies in central and
Eastern Europe, and most recently some least-developed nations
and large trading economies such as China, Taiwan, Vietnam and
Saudi Arabia. At present, 30 more countries, ranging from
Bosnia and Afghanistan to Russia, are negotiating on their
---------------------------------------------------------------------------
terms of membership.
FTAs and Preferences: Finally, the U.S. has developed a set
of tariff ``preference'' programs which exempt poor countries
from tariffs, and a series of free trade agreements with
individual countries. Most significant is the North American
Free Trade Agreement with Canada and Mexico, which in 2006
covered about $900 of America's $2800 billion in two-way goods
trade, and $100 billion out of $750 billion in services trade.
The preference programs for Africa, Latin America, Haiti and
the Caribbean apply to about 5 percent of goods imports, and
the FTAs apart from NAFTA to about 4 percent of two-way trade.
2. Structural Change: Geopolitics, Logistics and Telecommunications
Meanwhile, powerful structural forces independent of government
policies--in particular geopolitical change, logistical innovation, and
new telecommunications technologies--have been accelerating the opening
and integration of the global economy by opening major economies and
making trade in goods and services cheaper and more efficient. Their
effects are probably harder to measure than those of government-to-
government negotiations, but some estimates suggest that they have been
as important to trade growth and ``globalization'' as trade
negotiations and tariff cuts. Since no major multilateral trade
agreement has been concluded since the late 1990s, they have probably
been the most powerful forces for integrating the global economy in
this decade.
Geopolitics and internal reform: Shifts of political
orientation and changes in the domestic policies of big
economies have self-evidently powerful effects. The end of the
Second World War returned Japan and Germany to the global
economy in the late 1940s; more recently, the end of the Cold
War and the discrediting of economic planning has accelerated
the integration of China, central and eastern Europe, Russia,
Cambodia, Laos and Vietnam. A similar shift may now be underway
in parts of the Muslim world, in particular through reform in
Pakistan and Egypt.
Logistics: The invention of container shipping in 1956 and
the development of large-scale airborne express delivery
services in the 1990s, have drastically cut the time and cost
of moving manufactured goods among continents. Both continue to
progress rapidly. For example, the average capacity of a
container ship has risen from 1,500 TEU's a in 1996
to 2,500 TEUs in 2006, and the large new container ships now
under construction or newly launched carry 12,000 containers
and sometimes more.
---------------------------------------------------------------------------
\a\ Twenty-foot equivalent units, the size of a 20,x8,x8.5,
container.
Telecommunications: The global telecommunications network
and the Internet, in particular the launch of the World Wide
Web in 1993, the replacement of most of the world's copper
submarine cables with fiber-optics, and the continuous
deployment of new and more powerful communications satellites
are now speeding the integration of many services industries.
One indication is the fact that the average price of an
international phone call from the United States has fallen from
$1.00 per minute in 1990 to fifty-three cents per minute in
2000 and fourteen cents as of 2004.
Results
Altogether, sixty years of trade negotiations, logistical
innovation and improving telecommunications have created a vastly more
integrated world economy than the one in which Roosevelt and his
administration launched today's trade policy--or, for that matter, than
those in which Presidents Kennedy and Clinton formed trade policy.
1. Integration to Date
The WTO's release last week found world goods and services exports
rising to $14.4 trillion in 2006, in a global economy of $66.2
trillion. This means exports are the equivalent of 22 percent of global
GDP, as compared to roughly 5 percent in the late 1940s, and records
for the United States are much the same, with trade rising continuously
and roughly quintupling relative to GDP. Table 1 illustrates the trend,
using a few watershed years for trade negotiations and technical change
as markers.
Table 1.--Trade vs. GDP, 1947-2006 \2\
------------------------------------------------------------------------
U.S. Private-
Year Trade Event Real GDP in Import/GDP sector
2000 Dollars Ratio Employment
------------------------------------------------------------------------
1947 1st GATT 1.57 3.3% 39.0 million
Agreement trillion
1956 Container 2.23 4.5% 45.3 million
shipping trillion
invented
1968 Kennedy Round 3.65 5.0% 57.1 million
implemented trillion
1974 1974 Trade Act 4.32 8.3% 63.1 million
trillion
1980 Trade with China 5.16 10.4% 74.6 million
re-opened trillion
1994 NAFTA 7.84 11.3% 96.7 million
implemented, trillion
WTO created,
World-Wide Web
launched
2006 Today 11.05 16.6% 115.1 million
trillion*
------------------------------------------------------------------------
* Actual GDP in 2006 dollars was $13.246 trillion.
2. Exemptions and Exclusions
Nonetheless, trade liberalization is partial, not complete. A look
at the U.S. tariff system shows that some industries remain little
touched by trade negotiations. As Table 2 shows, while average tariffs
are low, consumer goods and some types of food remain covered by
tariffs roughly twenty times higher than those on most other goods, and
occasionally other forms of trade restrictions.
---------------------------------------------------------------------------
\2\ Bureau of Economic Analysis for GDP, Census Bureau and Almanac
of Statistical Abstracts for goods and services imports; Bureau of
Labor Statistics for private-sector employment.
Table 2.--The U.S. Tariff System Today
------------------------------------------------------------------------
2006 Tariff
Receipts Imports Rate
------------------------------------------------------------------------
Total Tariff $25.2 billion $1.845 trillion* 1.4%
Collection:
Light consumer goods/ $13 billion $122 billion 10.7%
assorted foods
Clothes $8.9 billion $79 billion 11.3%
Shoes $1.9 billion $19 billion 10.0%
Luggage/ $0.9 billion $6.8 billion 12.9%
Handbags
Household $1.0 billion $15.4 billion 6.5%
linens,
silverware
Plates,
glasses,
watches
Cheese/orange $0.2 billion $2.0 billion 10.5%
juice/tuna
Cars $2.1 billion $138 billion 1.6%
All other goods $10.2 billion $1.586 trillion 0.6%
------------------------------------------------------------------------
* Includes all products imported duty-free under FTAs and preferences.
In addition, trade liberalization has missed much of the Muslim
world, with the states of the greater Middle East participating less in
the WTO and retaining higher trade barriers than Europe, the Americas,
Sub-Saharan Africa or East and Southeast Asia.
Both exceptions have important and unpleasant effects, which I will
come to in a moment. But the modern American economy is certainly
closer to ``free trade'' than was the America of the 1940s, 1960s, or
1980s. As Roosevelt intended, we export more, we have a broader choice
of the world's goods and services, and we compete more against foreign
producers. We can assess the consequences in three ways: the positive
results, the areas in which too little has been done, and stresses
successful policy has brought.
Assessment 1: Positive Results
First, we can judge the results against Roosevelt's original
goals--a stronger peace, long-term growth and rising living standards,
a defense against a repeat of the Depression. Here, the record looks
very good.
Politically, despite the high tension in the Middle East, the world
is more peaceful than at any time in the 20th century. None of the
world's great powers--the U.S., Japan, Germany, U.K., France, Russia,
China, India--have come into direct conflict with one another since the
1960s. This long peace has no parallel in modern history, or for that
matter, apparently, in medieval history. On a broader scale, a study
last year at the University of British Columbia found a ``radical''
decline in warfare almost everywhere in recent decades, with the 1990s
``the least violent decade since the end of World War II.'' The authors
suggest a mix of causes--ideological conflict has waned since the Cold
War, decolonization has removed a grievance, U.N. peacekeeping missions
are often effective in preserving calm in tense regions--but credit the
global economy as well:
The most effective path to prosperity in modern economies is
through increasing productivity and international trade, not
through seizing land and raw materials. In addition, the
existence of an open global trading regime means it is nearly
always cheaper to buy resources from overseas than to use force
to acquire them.\3\
---------------------------------------------------------------------------
\3\ Human Security Report 2005, http://
www.humansecurityreport.info/HSR2005/Part1.pdf.
Economically, no crisis like that of the 1930s has recurred. Even
during the moments of greatest stress--the oil shock of the 1970s and
the Asian financial crisis of the late 1990s--respect for agreements
and rules proved strong enough to prevent a tariff war and a second
Depression. Instead there has been a long period of growth, during
which in real terms the U.S. has tripled private-sector employment and
raised GDP in real terms about eight-fold.
This reflects in part the fact that with more open markets,
American exporters can serve larger markets and take advantage of
economies of scale. Last year's exports totaled $1.2 trillion worth of
goods and services abroad in 2006, the largest figure in the world and
$200 billion above second-place Germany. American aircraft plants sold
418 big civil aircraft abroad last year, with China the largest buyer;
vineyards exported about 376 million quarts of wine last year, in
particular to Britain, Canada and Japan. American medical equipment,
high-performance computers, oranges, and grains all do well in foreign
markets. It is especially heartening to note last year's $100 billion
in manufacturing export growth.
Imports also have an important place in the U.S. economy. Import
competition, especially when--as it is today--accompanied by structural
change in the global economy, can create stress and anxiety which
require well-designed safety nets and adjustment programs. But overall,
openness to imports not only helps raise living standards by giving
consumers broader choice and better prices, but can keep inflation down
and thus facilitate faster rates of growth with lower unemployment. A
striking example is very recent: since the early 1990s and the
conclusion of the Uruguay Round, passage of the North American Free
Trade Agreement and the launch of the World Wide Web, the U.S. has
added over 20 million private-sector jobs, and reduced unemployment
rates from an average of 7.1 percent between 1980 and 1993 to 5.2
percent in the years since.
Abroad, trade policy can be remarkably effective in helping to
promote development and reduce deep poverty. Overall, economic growth
spurred by trade liberalization has combined with science, medical
advances, and public health and education to reduce poverty. Since the
1950s, for example, global infant mortality rates have dropped by more
than two-thirds; and the ILO's recent report ``The End of Child Labour:
Within Reach'' \4\ suggests that child labor rates are falling rapidly
as well.
---------------------------------------------------------------------------
\4\ ILO, ``The End of Child Labour: Within Reach,'' April 2006,
Part I, page 8. This suggests that the total number of child workers in
the world fell by 28 million between 2000 and 2004, with the most rapid
drops among the youngest workers and among child workers in hazardous
jobs; especially rapid drop in Latin America, where Brazil, Mexico,
Chile and other countries have implemented innovative plans based upon
stipends for low-income families trying to keep children in school. The
report is available on-line at http://www.ilo.org/public/english/
standards/ipec/about/globalreport/2006/download/
2006_globalreport_en.pdf.
---------------------------------------------------------------------------
U.S. policy has made important contributions to this. The African
Growth and Opportunity Act, passed during the Clinton Administration
and extended last year, is an excellent example, helping create nearly
two hundred thousand urban jobs in low-income African states like
Lesotho and Swaziland since 2000. Another is the reopening of trade
with Cambodia in 1996, which has created a national export-garment
industry that now provides jobs for 300,000 young women--a fifth of the
capital's population--and through them, cash income for hundreds of
thousands of nearly destitute rural families.
Assessment 2: Work Undone
Second, these achievements have gaps. Trade policy can be bolder
and more ambitious in opening closed markets abroad, reforming outdated
and regressive American policies, and addressing the deep economic
crisis of the Muslim world.
1. Opening Foreign Markets
To begin with, many significant barriers to U.S. exports remain in
place. Some are matters already covered by agreements and require
vigorous enforcement, to ensure that Americans receive the full benefit
of market-opening agreements and to defend the rule of law in the
global economy. Examples now subject to dispute settlement are the
European Union's Airbus subsidies and some aspects of Chinese
intellectual property piracy. Others require negotiation;
representative but hardly exclusive examples include high agricultural
trade barriers in the European Union, Chinese and Indian tariffs and
limits on services trade and tariffs on semiconductors and other
information technology manufactures in Brazil.
I might note that a trade policy focused on bilateral free trade
agreements is unlikely to address these effectively. Two-thirds of U.S.
trade is with the EU, Japan, China, Canada and Mexico. The only present
forum in which to reduce trade barriers in these countries (and large
developing economies like Brazil, Egypt, India and Indonesia) is the
WTO, most immediately the Doha Round. WTO negotiations also offer the
most important opportunities to use trade to promote environmental
goals. The fishery subsidy reduction proposal in Doha is a path-
breaking example of use of the WTO to reduce subsidies that threaten
the environment, and there may be options for multilateral ways to
reduce mining, timber and similar subsidies. APEC also has a ten-year-
old list of tariffs on environmentally beneficial goods, where
liberalization can reduce the cost of environmental protection;
environmental services are also an important opportunity.
2. U.S. Tariffs and the Poor
At home as well, American trade policy needs reform, with the
tariff system in particular tilted sharply against poorer Americans and
also many poor countries.
Since the early 1940s, the tariff system has been the smallest of
the major Federal taxes, raising about 1 percent of national revenue.
As such, it has received little attention from Congress or the Treasury
Department since the 1960s or 1970s. But it continues to raise $25
billion per year--about as much as the estate tax and half the gasoline
tax--and does so in an extraordinarily regressive way.
America's highest tariffs, as Table 1 above showed, are on shoes,
clothes and some kinds of food. Shoes and clothes alone, which account
for about 6 percent of American imports, raised nearly 40 percent of
all tariff money last year. Given the roughly three-fold markup between
border and store-shelf, shoe and clothing tariffs probably cost the
public $35 billion a year, and--like any life-necessity tax--hit poor
families with children much harder than wealthy or middle-class
families.\5\ Even this understates the system's tilt against the poor,
as tariffs on cheap and simple goods are far higher than tariffs on
luxury goods. For example, sterling silver forks have no tariff while
cheap stainless steel forks get 20 percent. A long-sleeved men's silk
shirt has a 1.1 percent tariff and its polyester equivalent 25.9
percent. A cashmere sweater has a 4 percent tariff and an acrylic
sweater 32 percent; a cheap drinking glass valued at 30 cents or less
gets 28.5 percent, and a luxury drinking glass valued at $5 or more
only 3 percent; and the tariff schedule is filled with similar
inequities.
---------------------------------------------------------------------------
\5\ According to the Bureau of Labor Statistics' most recent
Consumer Expenditure Survey, single-parent families spend about three
times as much of their income on life necessities as wealthy families.
See BLS, ``Consumer Expenditures in 2005,'' at http://stats.bls.gov/
cex/csxann05.pdf.
---------------------------------------------------------------------------
The effect abroad is much the same. U.S. tariffs are now minimal
for wealthy countries and energy producers, but very high for low-
income countries in Asia and the Muslim world. As Table 3 shows, the
high tariffs on cheap clothes sewn in Cambodia and Bangladesh mean
goods from these countries face higher tariff penalties than the much
larger volume of imports from their old colonial powers, France and
Britain.
Table 3.--U.S. Tariff Collection from Selected Countries, 2006
------------------------------------------------------------------------
Average
Country U.S. Imports 2006 U.S. Tariffs 2006 Rate
------------------------------------------------------------------------
Cambodia $2.2 billion $367 million 16.9%
Bangladesh $3.3 billion $496 million 15.2%
Pakistan $3.7 billion $368 million 10.0%
WORLD [$1.84 trillion] [$25.3 billion] 1.4%
France $36.8 billion $367 million 1.0%
U.K. $53.5 billion $430 million 0.8%
Saudi Arabia $31.1 billion $48 million 0.2%
------------------------------------------------------------------------
[International Trade Commission dataweb]
Despite their regressive effects, most U.S. tariffs seem to have
little relevance to employment. Between 1974 and 2005, clothes were
protected not only by tariffs but by a unique ``quota'' system capping
imports by country. When this system went into effect in 1974, about
1.2 million Americans worked at clothing jobs. By the time it was
abolished in 2005, only 270,000 were left.\6\ Shoes are even more
striking, with $2 billion in tariffs raised on products--like cheap
sneakers, where tariffs range from 37.5 percent to 60 percent and are
higher than tariffs on any other manufactured good--not made in the
U.S. for decades.
---------------------------------------------------------------------------
\6\ See Bureau of Labor Statistics, Employment Hours and Earnings
surveys, at http://stats.bls.gov/ces/home.htm.
---------------------------------------------------------------------------
3. The Greater Middle East
Finally, trade policy has largely missed the greater Middle East--
the region stretching from Morocco to Central Asia, with about 600
million people across about 25 majority-Muslim states. China's widely
debated boom in trade has been matched by an almost invisible collapse
in Muslim-world trade. Between 1980 and 2000, the region's share of
world trade and investment fell by fully 75 percent, from 13 percent to
4 percent of world exports, and from 4.8 percent to 1.6 percent of
foreign direct investment. Meanwhile, the region's population is
booming, with the total population of Middle East and Muslim South Asia
rising by 250 million. The International Labor Organization regularly
now finds this region with the highest unemployment rate in the world.
Here we have, on a smaller scale, a replication of the economic
patterns--closed markets, natural resource dependence--of the world of
the 1930s. It may be a coincidence that wars and political extremism
have faded from Central America and Southeast Asia, but have persisted
and spread in the greater Middle East. But it is likely that economic
stress and falling living standards contribute to a climate of anger,
frustration, and openness to radicalism.
The explanation for this is complex, as is any cure. The economic
crisis principally reflects conditions and choices in the greater
Middle East region as opposed to policies in other regions. Until quite
recently, few of the region's major economies were WTO members--in
2004, 11 of the 22 Arab League members remained outside the group--and
its major economies were variously walled off by high tariffs and
import bans, or isolated from one another by sanctions and boycotts.
The cause of the Muslim world's economic decline rests largely in
policies pursued within the region. These must accordingly change if
the region is to recover, and it is encouraging that the underlying
structure is beginning to change. Three Arab states have joined the WTO
since 2000, and three more along with Afghanistan, Azerbaijan and three
Central Asian republics are applying for membership. Both Pakistan and
Egypt have been revising economic policy to encourage investment and
integration with the world economy. An imaginative U.S. and European
trade policy can help by removing tariffs on light-industry goods and
farm products from these countries, as has been done for Africa and
much of Latin America.
Assessment 3: U.S. Competitiveness and the Social Contract
Third, an ambitious and energetic trade policy needs to be matched
by policies in international finance, domestic competitiveness,
adjustment and safety nets that allow Americans to remain confident
about their ability to succeed in a rapidly changing world. In all
these areas the U.S. is falling badly short. Let me focus, in my
conclusion, on two areas: national competitiveness and the eroding
social contract.
U.S. Competitiveness
The opening of the world economy has brought Americans export
opportunities and wider choice of the world's goods and services. It
has also encouraged the emergence of new competitors. This is not a
novelty of the 21st century: John F. Kennedy's trade program and
domestic economic policy in the early 1960s was in part a response to
the formation of the European Community, and Clinton's to the strength
of Japan thirty years later. But the size and rapid emergence of China
and India is understandably a reason for concern to many Americans.
Anxieties, about the ability of the U.S. to remain the world's leading
economy and the ability of workers to succeed in a more demanding
world, are not only easy to understand but often well-founded.
We should, of course, start from an accurate diagnosis of the
problem. As we have noted, the U.S. is not losing jobs in the
aggregate. Nor is American factory industry contracting or fleeing to
poorer countries. The Bureau of Economic Analysis finds U.S.
manufacturing's real-dollar share of the U.S. economy roughly constant
over the past twenty years.\7\ The U.S.' share of global manufacturing
industry remains stable as well. Direct investment patterns are roughly
balanced, with American manufacturers investing less in foreign plants
and acquisitions than foreign manufacturers invested here in both 2005
and 2006.\8\ Foreign direct investment in U.S.-based scientific,
technical and professional services and information industries likewise
outpaced the foreign investments of American companies in these fields.
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\7\ See Bureau of Economic Analysis, tables for ``Real Value-Added
By Industry,'' at http://www.bea.gov/industry/gpotables/
gpo_list.cfm?anon=807®istered=0.
\8\ The figures for 2006 are $67 billion in foreign manufacturing
investment in the U.S., and $56 billion in U.S. investment abroad. Data
are available at http://www.bea.gov/international/index.htm.
---------------------------------------------------------------------------
But anxiety about American prospects in the new century are
justified nonetheless. We do enter a period of transition and
structural change with considerable strengths. America's open society,
world-class university system, high quality of life, strong
intellectual property laws and other national assets are powerful
advantages in global competition. But our new competitors have great
strengths as well, in low costs, financial resources, and wealthy and
well-educated diasporas around the world--and the U.S. has weaknesses
that are widely recognized but still unsolved.
One example is the return of structural fiscal deficits, which has
joined with high energy costs and inflexible currency rates in China
and other developing countries to create a trade and current-account
imbalance with little historic precedent. Another are shortcomings in
the human-resource and science policies important to our leadership in
technology and innovation. These include low graduation rates in
science and engineering, restrictions on the ability of innovative
companies to recruit the best international talent, and long-term
declines in Federal commitment to basic research in chemistry, physics,
computers and other hard sciences. None of these problems are
insoluble, but none are likely to solve themselves.
New Social Contract
A still larger issue--probably the fundamental question in
sustaining public support for open-market policies--is the need to
reshape America's ``social contract'' for a 21st century economy. The
very success of American businesses in meeting a challenge from low-
income countries illustrates how important this is. Between 2001 and
mid-2003, with the U.S. in recession, American factories shed 3 million
workers. Since then, despite their steady growth, they have hired none
back. A shift of 3 million men and women from factory work to other
jobs would be traumatic at any time. It is even more so with the
Internet creating a global services industry as it drives down the
price of international telephone calls and data transfers.
This experience, of course, is not unique to America. All countries
must grapple with the rise of new economic powers and the intrusions of
the Internet. But the stress may be more acute here than in it is in
other wealthy economies. This is because the postwar American safety
net was unusual among big countries: in Europe and Japan government is
the principal guarantor of health benefits and pensions, while in the
U.S. large businesses served as the principal providers, with
government stepping in principally to support the poor, the elderly and
the disabled.
The consequence today is that as businesses adapt to low-cost
competition, most workers in Japan and Europe need not fear that loss
of health insurance or pension guarantees will come with a layoff. By
contrast, Americans have no national healthcare system and no pension
guarantees beyond Social Security, and businesses are visibly
retreating from their postwar roles as providers of health coverage and
pensions. Threats to the ability to pay high mortgage payments and
college tuition during periods of job dislocation add further
dimensions of insecurity.
Thus, even with unemployment rates low by historical standards, and
several years of economic growth, the American public is not wrong to
be anxious. A rational individual may well believe that open-market
policies are good for the Nation, but also that the personal cost of
job loss is unacceptably high. These concerns are reasonable and need
to be met through a comprehensive rethinking of adjustment and safety
nets that goes well beyond earlier upgrades to the Trade Adjustment
Assistance program. Ultimately this should mix government programs, tax
incentives for businesses, tax credits and vouchers for individuals,
direct spending, and new roles for unions to ensure that layoffs no
longer mean lost health insurance and pensions, threats to college
tuition and mortgage payments, and in the broad sense financial
catastrophe.
Conclusion
This leaves us a bit removed from ``free trade'' or ``U.S. trade
policy'' per se. To return to the Subcommittee's original question, one
might make three points.
First, trade policy has brought the United States and the world a
long way toward the realization of Roosevelt's hope of a strong
``economic basis for the secure and peaceful world we all desire.''
Second, it can do more--to create export opportunities by reducing
trade barriers; to help the poor by reforming outdated and regressive
policies at home, and to strengthen hopes for peace by supporting
reform and growth in the Muslim world.
And third, to yield its full benefits, it must be accompanied by
new and ambitious reforms at home, which blend open markets with the
domestic and financial policies that promote growth and give workers
the tools they need to succeed in an ever-more demanding world.
Once again, I am grateful to the Subcommittee for inviting me to
testify, and look forward to your questions.
Senator Dorgan. Mr. Gresser, thank you very much. Well,
this has been most interesting to hear different views of the
same issue. It's like eyewitness accounts of the same activity
and seeing something very, very different.
I want to start with something that Senator DeMint, I
think, said and I want him to correct me if I have it wrong
because I think it also goes to the center of some of this
discussion. I happen to think that big trade deficits, by and
large, are detrimental and also relate to the number of jobs
that are lost and I believe Senator DeMint, in his opening
statement, said that the trade deficit is really not a
deficit--do I have that correctly?
Senator DeMint. Can I clarify?
Senator Dorgan. Yes, please.
Senator DeMint. It's not a debt that we have to pay back.
Senator Dorgan. Not a debt.
Senator DeMint. But if I could--the point is, again using
the example before--wealthy people are always going to buy more
than poor people, just as wealthy nations will. It's probably
something America will deal with for a long time but if you
send $100 overseas to buy something and you get something that
is worth $110 in American dollars. You end up with more wealth.
So we didn't lose anything and there is no effective deficit.
Senator Dorgan. Well, I want to focus on that. That's what
I thought you said: that there is no effective debt. That's
going to be really bad news to the Chinese and the Japanese who
hold close to a trillion dollars of our currency as a result of
the trade deficit.
But it seems to me and I'll ask this question generally, it
seems to me that if you are consuming 6 percent more than you
are producing and you are purchasing from abroad those products
and giving them American IOUs, which means that we owe them
money, it seems to me, ultimately, you're going to pay them
back with a lower standard of living in this country.
Mr. Hindery, what's your reaction to that? Is there no
trade debt here at all?
Mr. Hindery. Senator, I think the question comes to the
core of these hearings today. Some of my colleagues on the
panel speak of past periods and even conditions today that
would suggest we're in surplus as opposed to deficit. We are
the only nation acutely in deficit on trade, and to hark back
to President Roosevelt 60 years ago and the conditions of that
time makes no sense to me when the deficit is being caused by
illegal and inappropriate trade behaviors by our largest
trading partners.
We cannot sustain a deficit in trade of this magnitude into
the foreseeable future. All trade theory, as Ms. Wallach can
comment, all trade theory is predicated on trade balance. That
is the whole theory of trade, and we are the only nation in
imbalance. She can speak more capably than I that we have, in
fact, had the tipping point when the benefits, Senator DeMint,
in my opinion, from lower cost products coming into the United
States have now been dwarfed by the costs to the women and men
who have lost their employment or seen their employment
downgraded.
None of the statistics dating back over the six past years
give me any comfort that our employment quality and our
employment numbers are improving--in fact, quite the opposite.
If we were to calculate unemployment, Senator Dorgan, as the
Europeans do, which talk about under-employed individuals,
people who have left the labor force, and people who are part-
time of necessity, our numbers are deeply at risk here.
Senator Dorgan. Let me ask Mr. Wenk--you and Mr. Gresser
largely ignored the question of the trade balance or the trade
deficit and described areas where we have actually increased
our exports, one of which would be China, for example. We have,
in fact, increased exports to China but we have dramatically
increased imports, sufficient so that now with China, we have a
$232 billion imbalance in a year. Does the U.S. Chamber find
that troubling from an economic perspective?
Mr. Wenk. Well, Senator, thank you for your question. There
is no question that there is a lot of hype about the trade
deficit and I think that some of the concerns that are raised
are valid concerns but, first, a couple things.
First of all, trade deficits tend to be pro-cyclical. If
you look over the last 25 years, when the economy is expanding,
the deficit seems to go up. So I mean, right now, we have
unprecedented growth in this country and the deficit is high.
There is no question about it. But there are some good things
that are happening because of the deficit in terms of some of
the products that we're importing are keeping costs low.
I think the other important point to raise is that if you
look at our free trade agreements and the deficit, there is an
important point to make there. If you look at the manufactured
goods trade deficit, for example, it is $530 billion, which is
obviously very substantial but of that amount, only $30 billion
is with our FTA countries, including NAFTA and further, our
deficit with our FTA countries has not risen in the last 5
years. So I mean, certainly there are concerns about the debt,
Senator, but that----
Senator Dorgan. I want to get the facts on the table here
and I think your facts are wrong, Mr. Wenk. I mean, the trade
deficit has increased generally across the board. Ms. Wallach,
why don't you respond to that? But I think the facts need to be
the facts. We all have our own opinions but we can't have our
own facts. Ms. Wallach?
Ms. Wallach. Well, first the trade deficits aren't cyclic.
They are the result of particular policies. We had a total
balanced trade in the huge boom period after World War II, one
of our greatest expansionary periods. So that's just not held
up by the facts, actually. Our trade deficit increased during
the recession, during the Reagan Administration. I mean, it's
unrelated. The fact is, we have a set of rules that are causing
particular results, which gets to the actual outcomes, which is
what Mr. Wenk has described as increased exports but he hasn't
described the imports. So the net for our free trade agreement
partners has been a catastrophe.
I mean, with NAFTA, we went from a surplus with Mexico to a
huge deficit. We went from a small deficit with Canada to a
huge deficit and systematically, with our free trade partners,
our trade balance has gone negative or is going negative unless
you sort of play with the numbers. Like for instance, he
mentioned CAFTA. Well, for the first--it's only partially
implemented but for the first year data, which was only
actually nine months of the agreement, there was a sort of
false inhibition on U.S. imports, imports into the U.S. because
we'd messed up the rules of origin for textiles and apparel and
everything was stuck at the docks.
But when you now look at the data, once that problem has
been cleared, we have--our free trade agreements are the source
of a major part of our deficit. The data is with the
government, not me.
Senator Dorgan. Mr. Johnston, some would say you just can't
seem to compete. Tough luck. It's a global economy, my friend.
If you can't compete in a global economy, what's wrong with
you? I mean, as you know, that's some of the discussion here
and around the country. I don't share that but those are
nonetheless the allegations. So why as American businessmen,
can't you compete, according to those who allege that?
Mr. Johnston. Well, Mr. Chairman, I think--if you look at
it from a scale of, from a business standpoint, a small
company. I deal with small companies. I deal with large
companies. What is happening in this economy, as we see it,
large multinational corporations are outsourcing everything--
basically when you say pieces and parts that are being made,
they are being outsourced. The large multinational
corporations--their idea, in today's economy, is to design, to
engineer and to assemble. They don't want to manufacture, all
right? And the question becomes, who can do it competitively?
Can it be done here locally in this country? Or is it going to
be outsourced to China or other countries? The question is, it
becomes strictly a price issue of who can do it for the least
amount of money.
What happens there, from a small business standpoint,
trying to compete, you lower your margins. You try to be
competitive, however as your margins shrink, it's very tough to
remain competitive, to be able to cover all your costs of doing
business.
Senator Dorgan. Mr. Hindery, do you want to respond to
that?
Mr. Hindery. Mr. Johnston's difficulties are not because of
the manner in which he or his counterparts run their companies.
There clearly are some things, Senator, that I believe this
Congress should do to make his task easier around his income
tax and worker advantages that might flow to his company. But
Mr. Johnston is losing his business because our trading
partners are cheating.
I think attention has to be paid not to the time-worn
debate about labor costs, which is tragic, and we need to have
ILO labor standards. The Chinese, the Indians and the Japanese,
however, are using currency manipulation and subsidies that by
anybody's measure dwarf by several factors the advantages they
continue to have from low cost labor and poor environmental
practices, both of which are inexcusable. But the subsidies and
the currency manipulation now, tax or capital or whatever you
want to call them, in the aggregate are factors more than the
predicament that he faces in Akron with his labor force and his
productivity.
Senator Dorgan. It seems to me if you can't learn from
experience, you're destined to repeat whatever that experience
was. I want to ask about Canada and Mexico. Mr. Gresser, I'll
ask you the question. We went through a free trade agreement
with Canada and then one with Canada and Mexico called NAFTA.
With Canada, we had a small deficit that has turned into a very
large deficit. With Mexico, we had a relatively small trade
surplus that has turned into a very large trade deficit. Would
you agree that that has been the case with both?
Mr. Gresser. That's certainly true.
Senator Dorgan. And if that is the case, would you agree
that at least that trade agreement or those two trade
agreements haven't worked out very well?
Mr. Gresser. No.
Senator Dorgan. So explain to me how it is successful if
you turn a surplus into a big deficit or a small deficit into a
much larger trade deficit. How is that beneficial?
Mr. Gresser. The trade deficit the U.S. has in general, I
think reflects three basic factors. One is the very low savings
rate of the U.S. We are the world's shoppers. We buy things.
Senator Dorgan. You're describing the cause of the deficit.
I'm asking whether the deficit is a success or a failure.
Mr. Gresser. I don't think the deficit is a success or a
failure of trade policy. It is a macroeconomic phenomenon
aggravated by the very sharp increase in oil and energy prices.
So I don't attribute the increase in surplus with Australia and
Singapore to the FTA with Australia and Singapore, nor do I
treat the increase in deficit with Mexico or Canada or Chile as
the result of those FTAs.
Senator Dorgan. Do you believe the trade deficit is a debt
that will have to repaid?
Mr. Gresser. We've been running a trade deficit since 1974
so--we've built up liabilities. Up to now, we've been able to
handle them quite well.
Senator Dorgan. What you do mean, handle them? What's that
mean?
Mr. Gresser. We've been able to grow and create new jobs
and manage the deficit without any noticeable stress on our
economy.
Senator Dorgan. Does handle mean paying your bills without
forfeiting?
Mr. Gresser. Yes. I suppose that's what it means.
Senator Dorgan. So that's a debt that has to be repaid. Mr.
Wenk, do you agree with that?
Mr. Gresser. It is a build up of liabilities that requires
us to pay back in the future. So far, it has not been
unsustainable or unmanageable one.
Senator Dorgan. I understand that. Mr. Wenk?
Mr. Wenk. I would agree with Mr. Gresser. Just to expand a
little bit more on NAFTA because I know this is an issue of
strong interest to you, Senator Dorgan. Forty-six out of the 50
states in this country--Mexico or Canada, is their top export
market. There are a lot of companies that export to Canada and
Mexico and U.S. manufacturing exports to Mexico and Canada have
been growing 50 percent faster than they have to any other
parts of the world. So NAFTA has been a success story for a lot
of companies and further, I would like to raise the fact that
if you look at our trade deficit with NAFTA, Mexico and Canada,
70 percent of that is oil imports and you never hear about
that, Senator. Seventy percent of our deficit with NAFTA is oil
imports and I know there is a lot of talk about what we want
to--in terms of energy independence from the Middle East--we
have our oil from Mexico and Canada and I don't think that's
such a bad thing.
Senator Dorgan. Mr. Wenk, just quickly, the U.S. Chamber of
Commerce, when we passed NAFTA, said the following and paid
some pretty expensive economists to say it for them as well:
the result of a trade agreement with Mexico will mean that high
wage, high skill jobs will remain in this country and we will
be importing the product of low wage, low skill jobs from
Mexico. Do you have any idea of what type of products are
coming from those types of jobs in Mexico that rank in the top
three imports from Mexico?
Mr. Wenk. I know if you look at our trade relationship with
Mexico, most of our imports are in autos and auto parts.
Senator Dorgan. Auto parts and electronics.
Mr. Wenk. And I know that was one of the main purposes for
NAFTA was to integrate the auto market in North America--if you
take out autos and auto parts, we actually have a trade surplus
with Mexico.
Senator Dorgan. Automobiles, automobile parts and
electronics are the top three and the fact is, it is exactly
the opposite of what the U.S. Chamber and its consultants said
would happen with Mexico, exactly the opposite. The reason I
ask that question is that if we can't learn after 10 years of
failure, we're going to repeat the same mistakes. That's the
dilemma here.
I'm going to allow Senator DeMint to ask some questions and
then I have some additional questions. Senator DeMint?
Senator DeMint. Well, thank you, Mr. Chairman and again, I
think this is a great exercise. We've got to figure out what
the real facts are here. I appreciate all the panelists. I do
think we need to make some distinctions. The trade deficit, as
you refer to it, is basically a private sector phenomenon and I
don't think my friends here on the right have stated this
correctly.
When we import, consumers are buying things, companies are
buying things. The Federal Government is not buying things
generally although that's a small piece of it. But the trade
deficit is not something that is paid back. We have to pay for
what we buy. But the money you talk about that China is holding
is government debt and that comes from the government spending
more money here than we're taking in, in revenue. It's not
related to the trade deficit.
Now, I would ask Mr. Gresser and maybe Mr. Wenk, just
quickly, do you think that the trade deficit is a debt that we
have to pay back? I'm not talking about do we have to pay for
the stuff that we buy but there is no accumulated debt and
certainly the government debt is not related to the private
sector trading and the imports. So would you wish to clarify or
are you holding to this that a trade deficit is a legal
liability that hasn't been paid?
Mr. Gresser. Overall, a trade deficit, as I understand
these things, reflects an excess of consumption or production,
where you're buying more than we make and grow.
Senator DeMint. Right.
Mr. Gresser. Over time, we have to pay for what you buy. If
you have high growth----
Senator DeMint. You pay for it when you buy it, don't you?
Like I go to the grocery store, I pay for something, take my
groceries home. I have a trade imbalance with them because they
never bought anything from me but I don't owe them anything.
Senator Dorgan. Maybe, Senator, if you might yield, if you
take $80 to the grocery store and buy $100 worth of groceries,
you're going to owe somebody $20. That's the issue.
Senator DeMint. But that's not what's happening.
Senator Dorgan. That's exactly what's happening. That's
exactly what's happening. We're buying six percent more than we
produce.
Senator DeMint. Well, the government debt that you talk
about as being held by China--is the government spending too
much and can't pay its bills. The trade deficit issue is a
separate issue and if companies are buying on credit, you're
right. We owe something. If the trade imbalance is partially
bought on credit then we need to look into how much of it is
being paid for with credit and how much is being paid for with
cash.
But generally, the companies that I've done a whole lot of
work with that trade all around the world, they buy something,
they pay for it. And maybe there are some that are leaving huge
debts overseas but that's something we need to look at.
But let me just make a couple of other points because I
think all of you made good points on both sides of this. I have
to say, though, I have a degree of disappointment with all of
the testimony. It seems that we all put on our glasses--either
we're for trade and we try to find everything good with it and
nothing bad, or we put on our glasses and we're against trade
and we just try to find everything wrong with it that we can.
Like Ms. Wallach has built her whole baseline on right after
the World War II economy where we had a war economy and we
bombed out our trading competitors and so we had a surplus.
You would expect that after what we went through in World
War II, but I think what we're not talking about is just the
reality that we are trading. We are going to trade. We have to
trade. We must compete with our trading partners. We're not
going to be able to dictate the rules of other nations.
Certainly we can write better agreements, hopefully getting a
more level playing field but we can never expect it to be the
same. The cost of business in South Carolina is different than
the cost of business in North Carolina or North Dakota. We're
not going to be able to get agreements where everything is the
same. So we have to be competitive.
I'm disappointed in my Chamber and business friends over
here that they didn't talk about more of the competitiveness
issues and the employment issues. I think on this side, if what
you are saying is true, half of the Americans would be out of
jobs. The fact is, we do have one of the best economies and the
lowest rate of unemployment. Wages haven't grown as much as
we'd like but consumer savings, if you add in that, the
American dollars are buying more. We do have growing exports
and manufacturing output is going up. Certainly we don't employ
as many in the manufacturing sector as we have because of
productivity, but manufacturing output is going up across the
country.
What I hear and I wonder who is really actually talking to
employers, because I talk to a lot of them. I don't hear that
they don't have jobs for people. I hear that they can't find
the workers they need at every skill level. They can't find low
wage workers in the hospitality business in South Carolina.
The high tech industry--when they come in my office and say
we need to expand visas so we can get more qualified workers
from overseas. What we need to be talking about is why aren't
we bringing more people into math and science and training them
to be engineers; so that we can do research and development in
this country and talk about the failure of our education system
where China and India are out-pacing us.
We do know that a large part of our trade deficit is energy
related yet as a Congress, we won't open up our own oil
supplies or even for low emissions natural gas. I've had
company after company in South Carolina say I can't produce
here. I can't produce plastics. I can't produce fertilizers
when I can go right across the border and get natural gas for
less than half of what we have to pay here. I can't compete
with the world.
Yet here in Congress, we still refuse to open up known
natural gas reserves. We know our tax rates are the second
highest in the world. When you've got countries with half our
corporate tax rate, how in the world are we going to compete?
And we talk about, let's put up barriers because other people
are cheating. And we're cheating on ourselves with a regulatory
and legal environment that makes it hard for us to compete.
So I agree that we need better trade agreements. We need
more enforcement of trade agreements. I think we have been too
quick to sign agreements and not quick enough to enforce them
and to get after them. But we can't take the strategy that hey,
let's don't have any more agreements because for the most part,
as it's already been stated, our markets are open.
Every time we go to do a trade agreement, generally we're
coming out better than we were before. It may not be where you
want but we're opening up their markets more to our products. I
don't think we've done enough, but I think we need to work both
sides of this. We need better agreements but we need to be
competitive as a nation and recognize those obstacles to
competition that we're not hearing enough of on the Chamber
side and we're certainly not hearing enough on this side. We've
got a skill level problem in this country where businesses are
demanding workers that we don't have in this country and we
can't keep saying we're losing jobs. Jobs are going away. We're
losing jobs in different sectors. We're gaining them in others
but the fact is, we're not producing a workforce that can
compete in a global economy and certainly not at the volume
levels.
I'll tell you, Mr. Hindery, I can tell you want to say
something and then I'd like to get some on the other side to
say something here.
Mr. Hindery. Senator, I find your comments about education
and energy policy comforting and very appropriate. None of us,
I believe, would take any exception to any effort by this
Congress to improve education in this country, to make it more
responsive to the needs of the employers, worker skills, a more
informed energy policy. You and I and Mr. Johnston do share
some backgrounds. We've drawn paychecks from our corporate
lives. We've had the privilege of running companies.
The concern that I have and I would ask you to think about
is, you and I know how to compete. Mr. Johnston certainly knows
how to compete. But competition has to be fair and the point I
would make to you to reflect on perhaps, is that I believe
passionately that we are losing in this trade deficit and jobs
issue because of unfair and illegal behaviors. I know all the
issues about productivity and under-educated and poorly
educated workers. I'll stand with you as I know this entire
Congress will, to address those.
The issue that has to draw attention quickly is that
certain of our major trading partners are using illegal
practices. When you commented in your statement that the trade
deficit is a private phenomenon, a corporate phenomenon, it is
not. Mr. Johnston does not compete against a Chinese
manufacturing company. He competes against the Chinese
government and a Chinese manufacturing company.
Most of the burden he has to confront competitively is
unfair subsidy, illegal subsidy under the WTO--very verifiable.
It's capital grants. It's loans. It's tax policies and it goes
on to currency manipulation. There has been much testimony----
Senator DeMint. I don't argue with the government
competition but that does not create a long term liability that
has to be paid back. I mean, we were just talking about the
deficit then. I don't disagree with you that China is cheating
and particularly in a manufacturing type of metalworking
environment. We have a very difficult time competing with their
subsidies. We do need to address subsidies.
At the same time, we can't say our corporate, our tax rates
are going to be 39 or 40 percent and that China is cheating by
not having a tax rate at all, or Europe is cheating because
they have a value-added tax that they rebate at the border. The
fact is, we're doing some of it to ourselves and we need to
talk about both sides of it.
Mr. Hindery. Well said, Senator. We are doing a lot of it
to ourselves and that is the point we're trying to make. There
are very positive, remedial actions around corporate income
taxes and around the way we address our own employer force in
this country. I'm just hoping that attention will be drawn
quickly to the fact that the loss of jobs is greatly
exacerbated by illegal behaviors.
Senator DeMint. Yes, good. Anyone? Mr. Wenk?
Mr. Wenk. Senator, I just want to say that you did hit the
nail on the head about competitiveness and I'm sorry I didn't
mention it more in my testimony, but this is absolutely
critical and all the issues that you raised are issues that the
Chamber is working on, on a daily basis. There is no question.
You mentioned the skilled workforce issue. When Tom Donahue is
out talking to our companies, there is no doubt that this is a
critical issue. So I just want to reiterate that we are right
with you. This is a competitiveness issue.
Senator DeMint. What I hope I can hear from you guys is not
just pushing Fast Track or more trade agreements. We've go to
push these other things. We've got Sarbanes-Oxley but it's
about to run us out of business as a nation and we're not doing
anything about it. But when the Chamber and other business
groups and pro-trade groups come up and say, we want Fast
Track, we want more trade agreements, you've got to have in
that package--we've got to have things that are going to make
us more competitive and get the government off of our back and
I'm not suggesting that we are talking about things that reduce
fairness to workers.
But it's going to be hard to compete with gold-plated
health plans and things like that, that we have on some of our
companies. But we need a balanced approach here. It doesn't
help at all to have a completely anti-trade position when most
of our economy is intertwined with trade. Even in South
Carolina where we were a huge textile state that now the
textile companies that remain are completely dependent on
exporting the fabric they make so it can be cut and sewn in
another country and sent back here without tariffs so that they
can stay in the loop.
And if we start getting protectionism on the border, first
of all, the other countries aren't going to take ours without a
tariff and when it comes back in, it's going to have tariff and
our fabric people are going to be out of business. Ms. Wallach,
I can tell you want to say something.
Ms. Wallach. Well, I want to challenge the notion that one
has to be either for trade or anti-trade. The discussion is
about under what rules. I'm for trade. The thing that concerns
me is the actual performance of the current rules. So under the
current rules, there is a labor arbitrage. The question of
where you're going to invest--you could whack every tax, Social
Security cost, healthcare cost and it still is a dollar a day
for a manufacturing worker in China and there isn't anyone in
America who is going to work for that.
So investment, going to the cheapest dollar to get the
highest return under these rules, which allows that, no matter
what you do for what you describe as competitiveness, is not
going to fix the situation unless you change the way the trade
rules work.
Senator DeMint. But you would agree that increasingly,
fewer and fewer manufacturing companies are actually relying on
a dollar a day worker. The fact--the more technically advanced
that manufacturing gets, the higher the skills level that are
required. And it makes it harder and harder for our trade
partners to compete with cheap labor. It's technology and it's
a lower cost of doing business.
We see that all over my state. It's not so much a matter of
the cost of labor anymore. It's other factors. There are very
few manufacturing companies now that the cost of labor is
nearly as high as it was 20 years ago so what we're trying to
do is look at those factors that make us less competitive and a
lot of them are outside the companies' control here in this
country.
Ms. Wallach. Well, the kinds of costs, though, that you're
talking about are those no one wants to live with the results
of. I mean, in China, it's not just the higher paid worker gets
$10 a day. You still can't compete with that as a U.S. company
or a U.S. worker, but it is also being able to dump your toxics
into the air or on the ground--no health or safety costs that
obviously are the bargain you make to live in a comfortable and
healthy country.
Senator DeMint. That's not what I'm talking about, though.
What I'm talking about is the cost of energy. There is no
reason our cost of energy should be two or three times as much
as they pay in China. There is no reason our corporate tax
rates should basically keep us out of the market--not just with
China and India but with our European allies as well. We're not
ready to change and there is no reason that as much as we spend
on education, which is more than any other country in the
world--that we lose ground every year with skill levels of our
workforce.
These are the things--but less and less, it's labor costs.
More and more, it's these other things.
Ms. Wallach. The energy costs, for instance, are exactly
what Mr. Hindery is talking about. The government subsidizes
it. The government provides the cheap energy so relative to
competition, we're talking about different rules.
Senator DeMint. Yes, we do exactly the opposite. We say
we're not going to produce our own even though it's here. We're
going to buy it from countries that are gouging us and we're
going to be less competitive. And unless we're willing to bring
all of this to the table and say, OK. We can keep ANWR off the
table. We can keep the Gulf natural gas off the table but the
fact is, that's more of a cost to most manufacturers than
labor.
Ms. Wallach. I just want to----
Senator Dorgan. Let me just--let me make a couple of points
and then ask some questions as well. First of all, being
competitive with what? Should we compete with someone in
Shenzhen, China, who is working for 20 cents an hour? Should we
compete with someone who is working in an unsafe plant? Should
we compete with a 12-year-old working for a dime an hour?
Should we compete with a country that says to the employer, if
your people are trying to organize, you're welcome to throw
them in prison? Should we compete with a company in China that
dumps its chemicals into the water and its effluents into the
air? Compete with what?
I'm talking now about regulations, the dreaded word,
regulation. We have expanded the middle class. We have created
regulations that have given us a better country over a century.
Now some say, well you can't compete. Go compete with Shenzhen,
China, some plant in Shenzhen that is hiring kids and dumping
the effluents into the air and water and by the way, shipping
off some folks that want to organize workers because they
didn't get paid, shipping them off to prison for a couple of
years.
I mean, that's competition I don't understand and don't
want to be involved in because I think they ought to be
competing with us by raising their standards.
The second point is this--I think it is very important for
us to try to decide what kind of a country we want. Is this a
race to the bottom? Or after a century of lifting our country
and creating something no one else created, an expanded middle
class where people had good jobs that paid well with benefits
is that what we aspire to have happen in the future?
I mentioned in the opening statement the 3,400 people laid
off by Circuit City. And it was interesting to notice that this
was in the name of efficiency. They were apparently good
workers but to be more efficient, you had to hire lower paid
workers and someone said, well, this is breaking the social
safety net that corporations have and they said, you get rid of
healthcare costs and retirement benefits in the name of
efficiency.
Well, I always thought that we created a country in which
people negotiated for wages with employers and part of their
compensation was a wage and benefits. And I think to decide
somehow that the road to efficiency that has dumped the
benefits of the American workers is exactly the wrong approach.
Having said all that, we're going to have a very
interesting discussion in this Congress about these issues and
should. But I want to go back to one of the central points at
the start. I think our experience has been largely a failure in
free trade because what's happened is that we ratcheted up very
high deficits. Last year, we exported $55 billion worth of
goods to China. We bought $288 billion from China, in goods
from China. We sent them $55 billion. We bought $288 billion.
The difference was $233 billion. That's a debt. We owe that to
somebody. And what happened was----
Senator DeMint. Are you saying we didn't pay for that?
Senator Dorgan. Oh, no. We sent them bonds and so they hold
American bonds or American currency with which they can
purchase----
Senator DeMint. Is there a motive to send them bonds?
Senator Dorgan. With which they can purchase your business
or perhaps part of your state, part of your real estate.
Senator DeMint. That's a fact we need to figure out because
that was not all done with bonds.
Senator Dorgan. Well, they are not holding fictitious
pieces of paper, I guarantee you. If they shipped us $288
billion worth of goods, I guarantee you that they wanted
something for it, either cold cash or instruments of debt. So
that's where the debt is, Senator DeMint and the debt is real
and I know of no economist that would suggest that all of that
which is now held by China and Japan is somehow worthless. That
is simply not the case.
Now I want to ask a couple of questions. Mr. Wenk said that
the average household has been increased by $10,000--I forget
the timeframe, which is an interesting statistic. Ms. Wallach,
respond to that.
Ms. Wallach. Well, my first response would be to propose
that the American public bill the Chamber of Commerce for their
$10,000 because most households certainly have not increased
$10,000 of income under these trade agreements. In fact, the
data--that number, just to understand it, that's the growth in
our national income divided by the population. So that doesn't
take into account distribution and the fact that our income
inequality has increased to levels not seen since the Robber
Baron era, with all the gains going to a very few on the top
and the bottom falling out, shows that in fact, for the
majority of Americans, not only have they not gotten the gain,
but as I demonstrated and there is a long paper by the Center
for Economic and Policy Research that shows the math. For most
Americans who don't have a college degree, 70 percent of us,
they've suffered net losses in income. That $10,000 has
accumulated in corporate profits.
Senator Dorgan. Just a couple of other questions. You're
all very patient and you're nice to come and make a
presentation. Mr. Wenk, the U.S. Chamber--I want to put up a
chart here. One of the problems that I see is businesses that
wish to go access cheap labor are searching for, for example,
the people that used to make Huffy bicycles, they all got fired
and now Huffy is actually a Chinese company in Shenzhen, China;
and so they wanted to make Huffy bicycles in China because they
can pay 20 or 30 cents an hour and work them 7 days a week, 12
to 14 hours a day in that particular factory.
When there is an effort in China to increase and improve
standards, here's what the result is, generally. This is a New
York Times piece. ``China drafts law to empower unions and
labor abuse.'' It was probably more window dressing than it was
substance, but that's what the Chinese government said because
of very substantial complaints and pressure from us.
The move which underscores the government's growing concern
about the widening income gap and threats of social unrest is
setting off a battle with American and other foreign
corporations that have lobbied against it by hinting they may
build fewer factories there. Hoping to head off some of the
rules, representatives of some American companies are waging an
intense lobbying campaign to persuade the Chinese government to
revise or abandon the proposed law. The American Chamber of
Commerce sent in a lengthy response with objections to the
proposals.
Mr. Wenk, isn't this a case where the American Chamber of
Commerce, on behalf of businesses in this country who want to
access cheap labor and conditions we would not allow in this
country, conditions by the way, that if they existed a block
down the street, you and I, I assume together, with every
member of the panel, would call law enforcement and go down and
shut it down. Isn't this a case of trying to see if you can
continue to keep down standards abroad. I mean, why would the
Chamber be involved in that?
Mr. Wenk. Thank you, Senator. This whole issue raises the
question of the race to the bottom argument, which we've heard
a couple of times today. If you look at 2005 Department of
Commerce data, 80 percent of U.S. manufacturing investment
happens right here in the United States of America. If you look
at----
Senator Dorgan. Eighty percent of what? I'm sorry.
Mr. Wenk. Eighty percent of U.S. manufacturing investment
takes place right here in the United States of America and if
you look at the other part of that piece, 90 percent of that
goes to high wage countries, namely Europe. So this whole issue
of race to the bottom, we think that companies are lifting up
and going to all these low wage countries. If you look at the
data, it just doesn't show that. It shows that mostly the
investment does happen here and the investment that goes abroad
goes to high wage countries, not to low wage countries like
China.
And with regards to China, there are certainly a lot of
challenges with regards to the U.S.-China economic
relationship. Clearly, the Administration has been heeding some
of these concerns. As you probably are well aware, they have
filed two or three WTO cases against China on subsidies and
intellectual property and others recently.
There is no question that China has a long way to go in
terms of meeting their obligations under the WTO, and we
strongly support the process that is in place right now between
the U.S. Government and the Chinese government, the strategic
economic dialogue, the JCCT, to make sure that we get China to
abide by all their WTO commitments and that's something that we
are strongly committed to doing, Senator.
Senator Dorgan. But that didn't respond to my question. My
question was, why would the U.S. Chamber weigh in--in
opposition to the government of China's apparent determination
to try to improve things for Chinese workers?
Mr. Wenk. I have to say, Senator, that was the American
Chamber of Commerce in China, which is a member of ours but I
am not unfortunately familiar with this issue. I could get back
to you in writing in terms of what the AmCham's position was on
this but as the U.S. Chamber of Commerce here, I was not aware
of this.
Senator Dorgan. If you will send me a note on that, I'd
appreciate it.
Mr. Wenk. I'd be happy to, Senator.
Senator Dorgan. Mr. Hindery, I want to ask you a question
but I want to preface it with a piece of information. When our
government--this was under the previous Administration, by the
way.
When our government negotiated a bilateral trade agreement
with China, a country which is now ramping up an automobile
export market because they wish to send a lot of Chinese
automobiles into this country, we said to the Chinese, with
whom we had a very large trade deficit, the following--when you
ship a Chinese car to the United States, we will impose a 2\1/
2\ percent tariff on it and when we ship a U.S. car to be sold
in China, you may impose a 25 percent tariff. To a country with
whom we had a very large trade deficit, we said, it's okay for
you to impose a tariff 10 times the size of the one we would
impose on bilateral automobile trade.
Now, I mentioned that fact, which I think is part of the
ignorance with respect to the construction of trade agreements
that causes many of these problems and I could go through
chapter and verse of these types of things, giving away the
store and not standing up for our country's economic interests.
My colleague, Senator DeMint, said that the trade deficit
is a private sector phenomenon. It is not at all--in fact, when
an American company is trying to compete in a circumstance on
bilateral automobile trade and our government has said, you
know what, we'll tilt the balance so that the Chinese can have
a 10-time advantage with respect to this bilateral trade with
respect to the tariff, that's a government issue. That's not a
private sector issue and the resulting trade deficit that comes
from it, it seems to me, is a direct result of government
policy.
But respond to this general question that the trade deficit
is a private sector phenomenon.
Mr. Hindery. The trade deficit has almost never in the
history of the world been a company-to-company phenomenon. All
of the abuses, Senator, arise around the intervention of
governments into what should be free trade and they make it
unfair trade. And that unfairness can be as disappointing as
the wage and environmental practices that Ms. Wallach spoke
about or it can be the subsidies, the tariffs, the loans, the
currency manipulation that you are referring to.
The point that I would continue to make to Senator DeMint
is it's not fair trade any longer. It hasn't been for a very
long time. The reason why TPA should not be approved in its
present form is simply to not have a repeat of the horrible
example you just portrayed. Congress needs to weigh in on these
issues in some form or in some fashion. Congress should not be
negotiating agreements per se. That can't be done in a body of
this magnitude but the standards, the principles that Congress
believes in has to be part of our trading practices.
The concern that I have about Senator DeMint's sense of
this deficit is, it is in fact, a debt. If you want to put it
into the context of one country versus another, the U.S. versus
China, we produce much, much less than we consume of their
goods. That has to be paid for. It's being paid for every day
by our children and our grandchildren into the future and
nobody believes, Senator no economists--none of that 6\1/2\
percent of GDP, year after year, 7 percent of GDP is a
sustainable deficit that this economy can handle. It's left
us--it's left China with $1.2 trillion of foreign reserves,
$1.2 trillion. It's using them against our national interests
in Africa. It's using them to buy our companies. That's the
next threat that we should confront is those dollars are going
to start coming back into the United States and buying up our
companies. And we have to get our hands around these subsidies
and these outcomes now before it gets even worse.
I really would call everyone's attention on this
Subcommittee, Senator, to the reality that the job loss is only
going to get worse from here. It's inevitably going to get
worse. We're not crying over spilled milk, as horrible as those
five million jobs are. We will lose 15 to 40 million more jobs
with the policies in place that Ms. Wallach spoke to, those
rules.
Senator Dorgan. Other than Mr. Johnston, will anyone else
at the panel have their jobs threatened? Mr. Johnston's firm,
he says, is suffering from a significant disadvantage but I
assume----
Mr. Hindery. I would have answered less likely and then I
watched Citigroup move 9,500 jobs that were of the sort that I
thought this next generation could take more comfort in. Tech
jobs, service jobs of every magnitude and manufacturing jobs
are now equally at risk by anybody's measure.
Senator Dorgan.--it used to be just the people who took a
shower in the evening after they came home from work whose jobs
were of concern. These were the people who went out and worked
hard on a manufacturing line or an assembly line. So they are
the folks that came home to find out that--or went to work to
find out that--their jobs left and they came home and said,
honey, I lost my job. It wasn't because I did a bad job, it was
because somebody would do the work for 20 cents an hour and I
couldn't.
But now, it is more than that. The threat, of course, is
for engineering and design and a whole series of things I've
described.
Mr. Hindery. You know, Senator Cantwell was here from the
State of Washington--you were here during the NAFTA discussions
and expressed your concern rightly today. The Boeing Company
was advertised in the NAFTA debate as one of the great
beneficiaries of NAFTA and the Boeing worker. Today, 10 years
later, Boeing has half of the American workers that it did at
the onset of the WTO-NAFTA--half.
Manufacturing of aircraft by the Boeing Aircraft Company,
Airline Company and aircraft company today--final assembly,
which is what we do here, is about six percent of the value of
that airplane. We have half the labor force in the Boeing
Company in Senator Cantwell's home state.
Senator Dorgan. My point was that people from think tanks
won't lose their jobs. The U.S. Chamber will be fine. Members
of Congress, we all wear blue suits and wheeze all day. Nobody
from Congress will lose their jobs. That might explain the lack
of urgency here in the Congress to try to deal with some of
these issues.
But another explanation is that there are people who
believe this has been a resounding success. I happen to believe
that the circumstances of our trade represent a failure, number
one, and number two, a failure to stand up for our own economic
interests, our own producers, our own workers and number three
and more important, I think this causes some very significant
future danger for our country, for our country's economic
opportunities.
I have not been Alan Greenspan's biggest fan over many
years because he usually sounds the alarm too late or takes
action too quickly, one of the two and depending on the
circumstances, with either interest rates or manufacturing
health.
But Alan Greenspan has been warning about the long term
consequences of this. Warren Buffet, of course--it would be
hard to find someone at the table that has a much better trends
seer or spotter than Warren Buffet. He feels like--the question
isn't when. The question is what will happen and how much of it
will happen.
If we were meeting here 2 years ago, people like Warren
Buffet and others would have told us as well. The question
isn't when the housing bubble bursts--all bubbles burst at some
point and he will make the point, and has many times, that the
question isn't when we have to come to grips with the danger
and also the consequences of a trade deficit that is galloping
along and is the highest in human history.
The question isn't when. The question is what will the
consequences be for this country and will we take action soon
enough? All five of you have offered interesting observations.
I have to leave for another engagement but if you want to
make any additional pithy, immediate short points, I'd be happy
to allow you to do that. Mr. Johnston, thank you for coming
here from Ohio.
Mr. Johnston. Thank you, Senator. I would like to add to
Mr. DeMint's comments earlier in regards to trade. I am not
against trade. I am for trade. It's just if you see it from a
level of manufacturing and you see small businesses that are
slowly going out of business because they can't compete and
watching this over the last 16 years, I've seen good times and
I've seen very bad times and I have to admit, the last couple
of years have been fairly good.
However, what's down the road, I guess, is the question and
I think we need to come to some kind of understanding from both
sides to where we can bring this together so that we can
compete fairly in the globalized economy. Thank you.
Senator Dorgan. I want to make one final point that has to
be addressed before I adjourn this and that is the issue of tax
rates. We are not creating tax rates in this country that put
American businesses at a disadvantage. First of all, the issue
isn't the rate. The issue is what tax is paid. And frankly, The
Washington Post the other day talked about the 10,000 offshore
subsidiaries in the Cayman Islands alone.
My notion is this--the biggest problem with corporate tax
is not that they are over-taxed. It's that they are not paying
their fair share and that's because of dramatic increases in
foreign subsidiaries. I've used the example on the floor of the
Senate many times, of the Ugland House, which is in the Grand
Cayman Islands on a little quiet street called Church Street.
It's a five-story, white building and it is home to 12,748
corporations. Of course, they are not there. That's an illegal
fiction created by high-priced lawyers to allow the corporation
to say, here's where we exist so that I can ship my jobs to
China, buy the products in this country, sell them, make an
income and run my income to the Cayman Islands and avoid paying
taxes.
Not every company does that, but far more do than should,
and we need to shut down those sorts of things and we need to
expect those chartered American corporations to behave just
like real people, those artificial people given life by
charter, to be an American means responsibility and part of
that responsibility is to help pay for our schools and our
roads and our defense system and all the things we do together
as Americans.
I do not buy for a moment the issue that there is some
over-taxation. That is not the case. The effective tax burden
of American corporations doing business around the world is not
exceeding other countries at all. That is not a source of anti-
competitive difficulty for American corporations. We will
likely have robust discussions about that in the future.
My colleague, Senator DeMint is someone for whom I have
great respect and obviously, we have disagreements on this
issue and we agree on some others but it is my hope through
hearings like this that we can begin to have a broader
discussion about what is happening. What really is happening
and what are the consequences of this for the American people,
for America's economic future, for America's businesses? What
are the consequences and what can we do about it?
So I appreciate very much all five of you traveling today
to Washington, D.C. to be a part of this hearing. The hearing
is adjourned.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Maria Cantwell to
Leo Hindery, Jr.
Question 1. My home state is one of the most trade dependent states
in the United States. Both my state and the entire country need
aggressive enforcement of trade laws to make sure our companies and
workers have a more level playing field. Therefore, we must identify
and carefully consider options to improve enforcement. Mr. Hindery,
could you please tell us more about your proposal to create a new Trade
Enforcement Division at the U.S. Department of Justice headed by an
Assistant Attorney General? How would it help ensure that our
enforcement efforts are better coordinated and more effective?
Answer. International trade needs to be rules-based if it is to be
valuable to the all members of the international trading community.
Accordingly, it is not good public policy or practice for the United
States to conclude agreements governing international trade and then
fail to ensure that the rules embodied in these agreements are strictly
enforced. Based on recent experience, it is impossible to be confident
that those officials in the Office of the United States Special Trade
Representative who negotiate trade agreements for this country are and
will be appropriately diligent in seeing that the agreements are then
strictly enforced. That is why I strongly favor creating a new Division
within the Department of Justice, headed by an Assistant Attorney
General who would be charged with enforcing trade agreements. The sole
function of this new Division would be to make certain that
international trade agreements concluded by the United States are
strictly enforced, and the Division would be managed by legal
professionals whose training, experience and independence are
consistent with this responsibility. America's economic interests would
be advanced by this construct, as would the foundation of the entire
international trading system, given the relative importance of the
United States as a global trading partner.
Question 2. We should also welcome private sector input into the
development of our trade policies. Both NGOs and CEOs have lessons to
teach our government about the impact of trade policies and they have
unique perspectives. Mr. Hindery, I know you participated in the
Horizon Project. Can you tell us more about that effort and who was
involved in it?
Answer. I chaired and organized the Horizon Project, which was
initiated in August 2006 to develop legislative recommendations which
the Project members believe would, if enacted, advance America's
prosperity and global competitiveness, while maintaining the country's
long-standing commitment to economic and social justice. The Project's
eleven members are corporate CEOs and policy specialists drawn from a
variety of economic sectors. The Horizon Project's legislative
recommendations, accessible at [email protected], cover four
policy areas: (1) Trade and Economic Growth; (2) Education; (3)
Healthcare; and (4) Public Infrastructure. The Horizon Project Report
and recommendations were presented to the Senate Democratic and
Republican Policy Committees in February 2007.