PREPARED STATEMENT OF

AMBASSADOR DAVID L. AARON

UNDER SECRETARY FOR

INTERNATIONAL TRADE

U.S. DEPARTMENT OF COMMERCE

BEFORE THE

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON INTERNATIONAL RELATIONS

June 15, 1999

INTRODUCTION

Mr. Chairman, I am pleased to be with you this morning to discuss prospects for our economic partnership with the European Union (EU). The EU is one of our most important economic partners and we welcome this Committee's sustained and informed interest in maintaining the health and stability of the U.S.-EU economic relationship. As we have seen in recent weeks the EU and the overall transatlantic economic relationship is evolving rapidly. Therefore, our relationship is very much a work in progress which requires considerable attention, both by government policy makers as well as by the private sector.

The EU has shown notable successes in its integration of 15 national economic markets, but the deepening and widening of this integration creates stresses within the EU and with the United States that require careful management. The Commerce Department, and particularly the International Trade Administration, is actively engaged in a number of commercial matters of great importance to U.S. exporters and the transatlantic business community. Today, I would like to provide an overview of the state of our economic relationship, some of the key areas that require attention, as well as the efforts we are applying to resolve trade disputes and other matters of commercial concern.

THE ECONOMIC SITUATION

The United States and the EU share the largest two-way trade and investment relationship in the world. In 1998, the U.S. trade deficit with the EU was $27 billion, an increase of $10 billion from the U.S. trade deficit of $17 billion in 1997. The U.S. Department of Commerce takes this very seriously. U.S. merchandise exports to the fifteen member states of the EU were $150 billion, increasing 6 percent from the level of exports to the EU in 1997. The EU is the first or second export destination for business in 41 of the states of the United States. U.S. imports from the EU were $176 billion, increasing 12 percent over 1997 import levels.

Until recently, our trade with the European Union has tended to balance out, with surpluses in some years offsetting deficits in others. From 1970 through 1995 in fact, our cumulative trade balance with Europe was a deficit of less than $1 billion for that entire twenty-five year period. Since 1995, though, our trade deficit with Europe has soared, cumulating to $60 billion over the last three years. This, however, reflects the difference in economic growth between Europe and the United States, rather than an increase in European trade barriers. The EU needs to strengthen its economy, as I will discuss shortly.

In addition to direct trade, the United States and the EU sustain a longstanding and very large investment relationship. In 1997, U.S. companies had $369 billion in direct investment in the EU. EU companies had a similar investment level in the United States and more than 6 million jobs were directly created together by EU and U.S. investment in each other's markets.

EUROPE'S ECONOMIC POLICIES

While the U.S.-EU economic relationship continues to be a robust one, the growing deficit bears close watching and we are becoming increasingly concerned about the need for the EU to make fundamental adjustments to its policies to address its economic weaknesses -- and to help share the burden of assisting other economies affected by the recent global crisis. One area of particular concern is the EU's continued reliance on export-led growth. For instance, the U.S. current account deficit increased by almost $100 billion from 1996 to 1998 largely as part of the adjustment in the crisis-affected countries in Asia. In contrast, Europe added $5 billion to its external surplus during this period. It would be far better for Europe to foster growth led by domestic demand, a policy path that also is less likely to impose economic burdens on other economies.

Europe has a number of positive alternatives to its current policy of export-led growth including structural reforms of labor, goods, and financial market and tax policies to make them more conducive to investment and employment. Europeans themselves are now acknowledging that high Europe-wide unemployment is due in part to overly rigid employment policies designed initially to address the hardship of unemployment. But reductions in legal working hours, early retirement programs, and restrictions on layoffs have actually made European structural unemployment problems worse. It seems that when companies want to produce more goods or services they are not eager to hire Europeans to make them. Inflexible European labor laws frankly speaking make European workers less attractive to hire no matter how highly skilled and productive they might be.

Such conditions also have led to persistent low levels of domestic European investment, capital outflows and weak aggregate demand, as Europeans and others increasingly see Europe as a less attractive place to invest. To be stronger, Europe needs to promote policies that stimulate employment and domestic investment. This is increasingly true with the advent of the euro and the new reality that Europe's policy choices affect not only Europe, but are starting to affect the rest of the world as well.

ENSURING A HEALTHY ONGOING U.S.-EU RELATIONSHIP

We are working -- and will continue to work -- with the Europeans to help make their economies as strong as possible and to strengthen our bilateral economic relationship. That is the best way to help guarantee our own economic stability and strength -- and that of the world economy. The large and highly interdependent U.S.-EU economic relationship is successful because of the continued efforts to liberalize trade and investment rules that affect transatlantic commerce. Through the successes of international trade liberalization, primarily through the World Trade Organization, and U.S. and EU internal reforms in regulation of commerce, growth of the transatlantic marketplace has been sustained by opening markets, reducing costs and improving the confidence of consumers in the protections provided them in the U.S. and EU markets.

But any large economic relationship, particularly one that is evolving in so many ways, generates trade disputes, and the U.S.-EU economic relationship has its share. It is important to keep in mind that while we have some very contentious trade disputes that have significant implications for companies directly affected, most U.S.-EU trade is virtually problem-free. We must resolve all of these disputes so that our rights and interests are maintained, and also so that the overall largely trouble-free economic relationship can go on benefitting producers and consumers. As we head into the mid-term U.S.-EU Summit for 1999, the United States and the EU can report progress in developing the means to address the issues that currently divide us in a more timely manner -- before these issues become big problems (I will discuss a bit later current efforts to develop so-called "early warning" principles and mechanisms), but concerns remain. Let me explain the major challenges that are before us as we move into the summer of 1999.

EU'S DATA PROTECTION DIRECTIVE

The United States and the EU both are making great strides to ensure the protection of privacy of individuals. Concerns about individual privacy have increased with the advent of electronic commerce. We both have the same goals of protecting personal data, but we differ significantly in our approach. Billions, if not trillions, of dollars in international trade -- and the future of the promising electronic commerce marketplace -- may well hang on whether we can find ways to bridge these differences.

The European Data Protection Directive prohibits the transfer of personal information from Europe to third countries that do not provide "adequate" data protection. Should the United States be judged not to provide adequate data protection, millions of data transfers from EU countries to the United States could be disrupted. I have been engaged in detailed discussions for over a year with John Mogg, my European Commission counterpart, to address the issues that the EU's data protection presents for our economic relations.

After informal discussions, we determined that our approaches to protecting privacy are highly compatible, but that we need to reconcile a few notable differences. Our discussions since then have shown considerable flexibility and practicality to develop proposals on the individual's access to personal data held by companies as well as the enforcement of the individual's right to protection. The United States proposed that we would establish a set of principles for data protection that U.S. companies could voluntarily use to deal with EU data protection requirements and that these principles would establish a predictable "safe harbor" for U.S. companies who wish to be deemed adequate under the EU's directive. To make these discussions successful, both the Commission and the Commerce Department undertook to make broad contacts in the transatlantic relationship. U.S. officials felt it necessary to discuss our positions directly with member state officials that were implementing the EU's directive and both the Commission and the Department of Commerce have had detailed discussions with a wide range of organizations.

Progress was made during the last round of U.S.-EU privacy talks on May 28 in Brussels. European Commission Director General for Internal Market and Financial Services, John Mogg, and I resolved a number of outstanding issues although several key items regarding the implementation of the safe harbor arrangement remain unresolved.

We may not reach agreement by the Summit on June 21, our self-imposed deadline. At this stage in our talks we have reached agreement on the meaning of the principles. We see eye to eye on the substance of the privacy issues; what we need to resolve is how each side will accept its respective responsibilities to make this agreement work.

As the negotiations turn away from the substance of the privacy principles, attention is focusing on issues such as the role of member states in the implementation of the agreement and the length of the transition period for U.S. companies to comply with the safe harbor. The outcome of our talks will depend on the member states' willingness to assume responsibility for implementing their side of the principles and on a reasonable and practical period of transition.

EU'S HUSHKIT NON-ADDITION REGULATION

On April 29, the EU Council adopted the "hushkit" regulation. This was the final legislative step, and the regulation is now EU law. However, the Council in adopting the regulation, postponed its implementation until May 4, 2000. This gives us additional time to resolve our differences with the EU on aircraft noise standards, specifically hushkit and re-engined aircraft issues.

Our first goal is to work with the EU through the International Civil Aviation Organization (ICAO) to develop new noise standards that will provide genuine relief from aircraft operations. The EU agrees with us that aviation regulations must be developed on a global basis, through the ICAO. We have proposed to the EU an accelerated process to develop the next generation of ICAO noise standards, i.e., "Chapter 4", before May 2000.

The Commerce Department and other agencies continue to oppose the EU "hushkit" regulation because it is based on a design standard rather than a performance standard, targets U.S. products, and fails to recognize aircraft which are compliant with the most recent ICAO noise standards, "Chapter 3". While the EU endorsed the ICAO noise levels when these standards were adopted, its regulation restricts access to the EU of aircraft which meet the ICAO noise standard through the use of hushkits and some re-engining. The regulation achieves no specific noise standard as noisier aircraft/engine configurations will be allowed to be registered in the EU. Most importantly, the regulation undermines the uniform international standards produced by ICAO. The regulation would have a major adverse financial impact on U.S. airlines and manufacturers. The impact is estimated to be at least $1 billion against the United States alone.

To address this issue with the EU, U.S. Cabinet members on several occasions discussed the "hushkit" regulation and its ramifications with their EU counterparts. Secretary Daley and USTR Barshefsky intervened in September 1998, and Secretary Slater met with EU and German officials on this issue in March 1999. I was the lead U.S. negotiator for the various negotiations with EU officials regarding the U.S. industry's concerns about the discriminatory effects of the EU's hushkit regulations. The negotiations resulted in the Council's postponement of the implementation of the EU hushkit regulation until May 4, year 2000.

We were also able to convince the EU to return to the ICAO with a commitment that the United States will address the next level of noise reduction goals in that forum. At the same time, the EU must recognize that it would be difficult for the United States to agree to a new noise standard in ICAO while the EU hushkit regulation is still on the books.

EU REGULATION OF GENETICALLY MODIFIED ORGANISMS

The Administration is increasingly concerned over the question of European market access for U.S. agricultural exports derived from bio-engineering. The United States has long viewed the EU's process for approving new agricultural products through bioengineering as being too slow and non-transparent. Unfortunately, the problem is getting worse. Strong European public opposition to the use of genetically modified organisms (GMOs) in food now threatens to stop the EU from approving any new products produced through bioengineering.

As of last year, there were seven varieties of genetically-modified corn that had been approved in the United States that had not yet been approved in the EU. Four varieties of U.S. developed "Bt", or pest-resistant corn, have been in the EU approval process for over two years. The Commission has not approved any biotech products in a year and it recently announced that it was postponing the approval of Pioneer's Bt corn application because of recent findings on the effects of GMO corn on the U.S. monarch butterfly population. While the United States certainly recognizes the right of the EU to take the steps necessary to ensure the health and safety of its citizens and the environment, we would hope that EU policy would be ruled by sound science and not political pressure on this issue. This is especially important because U.S. farmers are increasingly turning to genetically modified-derived corn varieties at home. Nevertheless, if we hope to continue to sell U.S. corn to Spain and Portugal, a $250 million annual market for U.S. farmers, we must reach some type of understanding with the EU. To establish agreed rules for trade in biotech products and to foster greater understanding and acceptance of the U.S. approval process for GMOs, the United States is engaged in a number of international and bilateral initiatives. The Transatlantic Economic Partnership's Biotech Working Group is one such forum where the United States is working with the EU to address issues of mutual concern. We have much work ahead of us in this area, but we are committed to finding solutions as the stakes are so high for the United States.

THIRD GENERATION WIRELESS COMMUNICATIONS SYSTEMS

The Administration and U.S. industry have had concerns that EU efforts to be the first to implement third generation (3G) wireless systems were intended to replicate the first-to-market advantage that benefitted European vendors in the second generation and helped lead to widespread adoption of the European-developed Global System for Mobile Communication (GSM) technology. Mandating the use of a single, European-developed wireless standard within Europe well before the International Telecommunication Union (ITU) completes its 3G standards development process later this year could effectively preclude all the candidate technologies from receiving a full, fair and transparent consideration as potential global standards. In addition, the EU's Universal Mobile Telecommunications System (UMTS) Directive on 3G licensing fueled efforts to get the European standard commercialized before other technologies could be standardized.

We forcefully advocated for an open, market-driven approach for developing these standards, which would give operators the freedom to choose the technology that best meets their needs and allow multiple standards to compete freely and fairly in the marketplace. In addition, we have sought specific assurances from European governments that competing 3G technologies and services can be deployed in Europe in a time frame comparable to that in which European-sponsored 3G technologies and services are deployed. Achievement of these two goals would allow U.S. manufacturers and service suppliers, for the first time, to have an opportunity to serve the European market using U.S.-designed technology. Moreover, it would maintain the commercial viability of U.S.-developed second generation wireless technologies which were being portrayed in key third country markets, such as China, as having no future.

In response to our efforts, the EU went on record in support of the ITU process and an industry-driven approach. The EU also clarified that its UMTS Directive requires member states to reserve a minimum of one 3G license (i.e., not all) for the European-developed technology. In February, the Transatlantic Business Dialogue (TABD), a U.S.-EU industry forum, broke a lengthy impasse on 3G standards by forging consensus on a multiple standards compromise that was satisfactory to U.S. industry. In March, a key ITU meeting in Brazil endorsed the TABD concept of multiple 3G standards. In another positive development, the Finnish government, which issued the first 3G licenses in March, refrained from mandating a technology. These developments seemed to indicate that a market-driven solution to this issue might indeed be possible -- with governments appropriately taking a secondary role in the technology selection, development and licensing processes.

However, there were indications that Europe might not adopt the TABD/ITU 3G standard as expected and that European governments were moving to defeat any expectation that the TABD/ITU compromise would result in introducing U.S. 3G standards technology into Europe. EU officials met with member states on May 25 to discuss 3G licensing, reminding them that the UMTS Directive only requires that one license be reserved for the European-developed standard and encouraging them to be mindful of their obligations under the WTO Basic Telecommunications Agreement. We continue to relay the message in all meetings with European officials that we expect them to license and assign spectrum for 3G systems based on any and all standards that emerge from the ITU, and that any decision to the contrary would create strong concerns in the United States regarding EU and member states' compliance with their WTO obligations.

Most recently, a 3G Operators Harmonization Group (OHG) concluded a series of meetings with a potentially key agreement on a technical framework for 3G harmonization. The OHG Agreement represents a positive and detailed framework for future harmonization work and is compliant with the February TABD agreement. Virtually all major operators and manufacturers (from 13 countries, including the U.S. and EU member states) have endorsed the OHG Agreement. The Agreement has been forwarded to the ITU, as well as to national/regional standards bodies and the two multi-regional "partnership projects" which are developing 3G standards. We understand that the ITU has endorsed the document, and that standardization work is already underway.

We are pleased that industry has developed, and the ITU has adopted, the harmonized standard proposal put forward by carriers and manufacturers. However, there continues to be some concern that Europe will move slowly on the adoption of the harmonized standard so that its current proposed regional standard will gain a market advantage. The OHG agreement depends in large part on the good faith efforts of the Europeans to make the changes to their existing standard as recommended in the OHG Agreement, and to support the provisions related to the evolution of the U.S. standard in standards bodies around the world. If the Europeans delay or fail to do the work that is recommended in the OHG Agreement, then the harmonization effort could well fail. Thus, although we are cautiously optimistic, given the possibility that pending European licensing or standardization decisions could still cause the OHG Agreement to be moot, we will continue to carefully monitor developments. We believe the TABD can continue to be helpful in both monitoring progress and providing opportunities for the United States and the EU to discuss any issues or problems that might arise.

EU ENLARGEMENT TO INCLUDE CENTRAL AND EASTERN EUROPE

Another issue on which we are actively working to safeguard the interests of U.S. companies concerns the enlargement of the EU. On March 31, 1998, the EU launched accession negotiations with Poland, the Czech Republic, Hungary, Estonia, Slovenia and Cyprus. These countries are in the first tranche of countries to be considered next for EU membership. Those which are slated to join at a later time include: Romania, Latvia, Lithuania, Slovakia and Bulgaria.

The U.S. Government fully supports EU enlargement into Central and Eastern Europe (CEE) in a manner which encourages further economic reforms and facilitates these countries' continued

transition to market economies. The EU and the CEE countries are expected to integrate their commercial legislation to provide uniform and effective levels of protection in the areas of public safety, health and the environment, as well as important commercial changes such as better enforcement of intellectual property protection and the adoption of a uniform common external tariff. These changes will greatly benefit the transatlantic market. However, U.S. commercial interests in the region may be negatively affected by the transitional arrangements prior to accession and the final terms of accession. In fact, to a certain extent, U.S. commercial interests already have been affected, as in the case of U.S. export of motor vehicles. This is a matter of great concern to us, and we have been discussing it with several governments in the region. In fact, this week Assistant Secretary for Market Access and Compliance Patrick Malloy is in Central and Eastern Europe discussing precisely this issue with Polish, Hungarian, and Czech government officials. A permanent solution to this issue would be the reduction of CEE countries' MFN tariffs on industrial products to the level of the EU's common external tariff as soon as possible.

Since 1991, the European Union has had association agreements with Poland, Hungary, the Czech Republic, the Slovak Republic, Romania, Bulgaria, Estonia, Latvia, Lithuania, and Slovenia. Some U.S. companies have complained that the association agreements hinder their business prospects in these markets. These agreements grant preferential tariff treatment to EU products and establish schedules for gradually reducing tariff rates on EU non-agricultural products each year until the rates reach zero. For U.S. products, higher most-favored-nation (MFN) rates are maintained at average tariff levels three times higher than the U.S. and EU's MFN tariff rate and, on average, eight percentage points higher than that experienced in EU-CEE trade. These tariff differentials between the EU and CEE countries' MFN rates will exist until these countries' final adoption of the EU common external tariff, presumably for the length of the entire transitional period. Negotiations have just begun for the first six countries, which are not actually expected to join the EU until 2005 at the earliest and the complicated discussions in the EU over internal reforms called "Agenda 2000" do not lead us to believe that accession will be any earlier.

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There are sectoral concerns over the EU's process for enlargement including, as I already mentioned, in the area of autos. Another concern we have relates to the pharmaceutical sector. In the case of patent protection, specifically, a transitional ban on exports (resulting from a derogation from the free movement of goods) should remain in effect until such time as the new product patent laws adopted in each CEE country take practical effect locally -- which is 10 years from the date that such protection was formally recognized in each country. In fact, a majority of products on the market will be covered only by process patents until 2010-2015. Process patents are not considered to be adequate or effective protection because they do not protect the product against piracy, but rather the chemical process used in manufacturing them. Further, violation of such process patents is extremely difficult to prove.

The key transitional safeguard measure which the U.S. and European pharmaceutical industries seek is a derogation from the principle of free movement of goods within the EU once the CEE countries become EU members. In effect, this derogation would, for a limited period of time following CEE accession to the EU, ban pharmaceutical exports from the CEE countries (where patents for pharmaceutical products have not been available) to other EU member states (where pharmaceutical products have enjoyed strong patent protection). The derogation would not prevent CEE pharmaceutical companies from exporting generic products which are not under patent in the EU member states.

BANANA AND BEEF HORMONE DISPUTES

The two most publicized U.S.-EU trade disputes this spring, those involving bananas and beef hormones, are progressing according to WTO rules as administered by its Dispute Settlement Body (DSB). Regarding the bananas dispute with the EU, the World Trade Organization (WTO), on April 19, confirmed for the fifth time in six years that the EC's banana regime is not consistent with its international trade obligations. We hope that the EU will finally comply with its WTO obligations. We remain open to negotiating a WTO-consistent solution with the EU. Since the late 1980's Latin American countries and the United States have urged the EU to implement the "Single Market" for bananas in a manner consistent with their international obligations under the GATT (General Agreement on Tariffs and Trade) and the subsequent international agreements under the WTO. Unfortunately, it has taken five international trade panels six years to bring the EU to the point of considering changing its banana regime. The United States now has imposed 100 percent duties on $191.4 million on goods from the EU. These increased duties will remain in effect until the EU institutes reforms of its banana import regime in a manner consistent with its WTO obligations.

On the beef hormone ban, the United States has made it clear to the EU that while we hope to find a way to resolve this dispute, we will move forward to protect our trading rights. You may recall that the EU has effectively blocked U.S. beef exports to the EU since 1989, when it introduced its ban on the importation of beef from cattle treated with hormones. After appealing the 1997 WTO panel's findings against it, the EU was given until May 13, 1999, to come into compliance with a WTO ruling that found the EU's ban inconsistent with the principles of the

Sanitary and Phytosanitary (SPS) Agreement. The EU once again missed the opportunity to show the world that it will respect the results of the WTO dispute settlement regime all Members agreed they would abide by. The real issue continues to be the EU's refusal to comply with the WTO rulings and its unwillingness to honor its international obligations.

Therefore, we had no choice but to exercise our right under the WTO, and, on June 3, requested authorization to suspend concessions in the amount of $202 million, an amount equal to the level of damages that U.S. exports suffer on an annual basis. The EU responded by exercising its WTO right to request arbitration on the amount of our damage estimate. The United States will respect the WTO process and participate fully in this arbitration process, which must be completed by July 12. U.S. implementation of the suspension of trade concessions and publication of the final list will be done after completion of this process and DSB authorization. We are ready to return to negotiations with the EU whenever the EU is ready to make a commitment to lift its ban on U.S. beef.

AUGMENTED OPPORTUNITIES FOR U.S.-EU DIALOGUE

In recognition of the need for close consultation and cooperation on a variety of matters, the United States and the EU inaugurated a series of initiatives since 1996 to identify priority areas that need to be addressed and to provide the fora to make progress.

The "New Transatlantic Agenda" (NTA) was established at the Madrid U.S.-EU Summit in December 1995. It marks the first time that we attempted to establish a high level -- heads of government -- commitment that seeks cooperative action on resolving commercial problems. The NTA is the blueprint for U.S.-EU cooperation into the 21st century and expands our relationship -- not just in commerce, but across the board -- to provide a comprehensive mechanism to resolve problems and to find areas of common interest in which joint approaches can be developed. The Agenda commits the EU -- both the Commission and the 15 EU member states -- and the result has been a broadening of the dialogue with Europe to include in-depth interaction with the member state leadership as well as the traditional Commission contacts.

One of the most important aspects of the NTA is the breadth of its mechanisms, which provide a degree of contact among U.S. and European government officials unparalleled in the past. At the top, the semi-annual U.S.-EU Summits at the Presidential level provide the impetus to keep the relationship moving forward. The Summits are supplemented by meetings of the "Senior Level

Group" (SLG), bringing together the senior trade and economic officials of both sides. The SLG in turn establishes discussions to address trade issues at the working level.

We are very pleased, Chairman Gilman, that you have taken the lead in the Transatlantic Legislative Dialogue (TLD). We expect the TLD to add significantly to the richness of transatlantic contacts, and found its inaugural meeting, held during last month's SLG with SLG member present, to be very productive. Although the U.S. Congress has met with the European Parliament, its EU counterpart, for many years, this was the first meeting as a "Dialogue" as

envisioned by the NTA. The TLD will provide a valuable new forum for lawmakers to increase their understanding of societal concerns on each other's side of the Atlantic. We also believe that the TLD will serve as an important vehicle for early warning of possible future trade irritants as all too many of these stem from legislation originating in either the Congress or the EU Parliament that is not well enough understood by members of the other legislative body. We applaud the formation of the TLD and look forward to many more joint meetings between the legislative and executive branches under the banner of transatlantic cooperation.

An important goal of the NTA is to create an eventual barrier-free transatlantic marketplace for trade and investment by working, on a pragmatic basis, to take step-by-step action to identify and eliminate remaining commercial obstacles across the Atlantic. Over the past three years, the NTA has helped resolve a remarkable number of problems and has prevented the escalation of smaller problems into larger ones. The U.S.-EU data privacy discussions were established by this process, as well as efforts to address the recent hushkit issue. The Transatlantic Economic Partnership (TEP) was also established under the NTA with a more formal agenda and time frame to address issues in the service industries and regulatory cooperation, as well as many other elements of bilateral relations.

TRANSATLANTIC ECONOMIC PARTNERSHIP

Since last December, Working Groups continue to meet in all the TEP areas and are implementing a variety of initiatives as called for in the Action Plan. These include the identification of new industrial sectors for mutual recognition of conformity assessment standards; development of a framework for a mutual recognition agreement covering selected services sectors; development of initiatives covering biotechnology, food safety, and plant and animal health; and coordination of positions regarding trade and the environment and trade and labor. The TEP Action Plan also establishes a bilateral dialogue on multilateral trade issues in the World Trade Organization, with the intention of coordinating positions in preparation for the GATS 2000 Services and Agricultural talks, as well as the WTO Ministerial in Seattle.

To date, USTR and the interagency team supporting TEP implementation efforts have worked conscientiously to avoid having any trade dispute spill over that would negatively impact on the TEP. Negotiators continue their efforts towards positive cooperation and mutually beneficial, balanced, tangible results under the TEP. USTR and the European Commission will have more detail to report on the TEP at the June 21 U.S.-EU Summit in Germany.

CIVIL SOCIETY DIALOGUES/TRANSATLANTIC BUSINESS DIALOGUE

In recent years we have found that limiting transatlantic contacts only to government to government dialogues limits our ability to develop a strong economic relationship. Therefore we have encouraged the private sector to establish bilateral discussions addressing important elements of the transatlantic relationship. Notable successes include the Transatlantic Business Dialogue (TABD), the Transatlantic Labor Dialogue (TALD), the Transatlantic Consumer

Dialogue (TACD), and the Transatlantic Environmental Dialogue (TAED).

The TABD, made up of representatives from U.S. and EU companies, offers the business community the opportunity, through a process of developing and submitting specific recommendations to government, to advise us on how we can best move forward with the liberalization of the massive transatlantic marketplace and reduce costs caused by redundant government requirements. The TABD's work has produced a number of significant successes, and continues to provide government with the advice we need. Similarly, the TALD and the other Dialogues allow the U.S. and EU private sectors to work together to identify priority areas to establish improvements in transatlantic relations.

The TABD has consistently told government officials that the main impediments to trade across the Atlantic are divergent standards, testing and certification requirements, as well as other regulatory differences. The TABD has been an important factor in virtually all of the improvements in our transatlantic trade in the past four years. The TALD is developing recommendations on labor standards that are applicable internationally. We expect these Dialogues to develop agendas that they and governments will be able to address to improve U.S.-EU relations.

Under the leadership this year of Xerox and the French company Suez Lyonnaise des Eaux, the TABD has established a very challenging agenda for improving economic relations. We are working now with the TABD to make the next TABD Conference, to be held in Berlin on October 29-30, 1999, one of the chief events for improving U.S.-EU economic relations. Secretary Daley will lead the U.S. Government delegation to the Berlin Conference. Some of the issues gaining momentum for the Conference include: electronic commerce, accountancy standards, priorities for the WTO Ministerial, and expansion of regulatory cooperation.

We also are pleased that the TABD continues to give high priority to 3G Wireless, as I discussed earlier, to ensure that this important issue comes to closure this year, and that it is paying increasing attention to alerting government of possible future trade irritants, as at its recent Mid-Year Meeting where it identified specific regulatory issues that must be addressed soon to head off bigger problems.

EARLY WARNING AND PROBLEM RESOLUTION

Given the recent contentious, headline-grabbing trade frictions between the United States and the EU this spring, the United States and EU have come to realize that more must be done to identify future trade irritants before they become full blown trade problems. Over the past few months, a U.S. Government interagency group, led by the State Department and including the Commerce Department and the Office of the U.S. Trade Representative, has been discussing with the European Commission the development of a bilateral "early warning and problem resolution" process for announcement at the June 21 U.S.-EU Summit.

Through such a process, the U.S. Government and European Commission would seek to coordinate better, both internally and bilaterally, by setting down principles and mechanisms to enable us to identify and solve bilateral problems at an early stage. This process will help address the legitimate concerns of our citizens at a time of an increasingly interdependent economic relationship and closer political cooperation between the United States and European Union.

Early warning is intended to improve the capacity of each side to take the other side's interests into account at an early stage when formulating policy, legislative, or regulatory decisions, without limiting each side's existing decision-making authority. Both sides understand that we are not seeking to create a new bilateral dispute settlement mechanism. We are simply working to identify through an agreed process potential frictions at an early stage, and to resolve them, at the technical level where possible and at the political level, if necessary.

In addition to attuning government officials to work on the early warning concept, we will also invite the Civil Society Dialogues to contribute to this effort by identifying problems and designing proposals for resolution. As you know, the Transatlantic Business Dialogue has been widely recognized as a key private sector contributor in this type of work to date, providing valuable input and assistance to identify potential trade frictions and to resolve a number of trade issues, particularly in the standards and regulatory policy area.

U.S.-EU COOPERATION IN PREPARING FOR THE WTO MINISTERIAL

Another important area where the EU and the United States are working together is to ensure that the Seattle Ministerial leads to further trade liberalization and an improved and strengthened WTO system. We regularly discuss these issues bilaterally and in the regular Quadrilateral trade meetings involving the United States, the EU, Canada and Japan, and while we may have different views on issues, we share a commitment to further liberalize the world trading system. Of course, there are some areas of disagreement. For example, the EU appears reluctant to endorse the WTO's work on reducing or eliminating tariffs in the package of industrial items agreed to by APEC members, preferring at this point not to commit to sectoral negotiations. The EU is also reluctant to address labor issues in the WTO, although it does agree with us that core labor standards should be more widely respected throughout the world and that it is important for the WTO, ILO, and other international organizations to cooperate more closely on labor issues. We are in agreement with the EU that the next round of trade negotiations should be short -- about three years -- and that we must focus first on ensuring that talks already scheduled in the WTO covering at a minimum the built-in agenda on services and agriculture, and a manageable agenda dealing with institutional reforms, such as transparency, and allowing for ongoing talks like the transparency agreement on procurement. In addition, the EU shares our view that the WTO must move ahead quickly to improve the transparency of its operations and strengthen public confidence in it. We discussed these issues during the Quadrilateral trade meeting held in Tokyo in May, and will continue to work with the EU over the next few months to ensure that the next trade round is a real success.

CONCLUSION

In conclusion, I would again like to thank the Subcommittee for holding these hearings to allow us to discuss the many important initiatives that we are pursuing to liberalize transatlantic commercial relations and present the many means that we have developed, and are continuing to develop, to make progress on these issues. Recently, there has been some concern expressed that the EU's attempts to undertake internal reforms could affect the ability of the United States and the EU to address important and pressing bilateral and multilateral issues. Some have expressed concern over the resignation of the European Commission -- an event without precedent in the nearly 50-years existence of the EU and its predecessors. While there was uncertainty when this first happened, in the almost three months following, we have continued to work with our European Commission colleagues to make progress on many issues.

But, we face a problem almost as intimidating here in Washington which I would like to bring your attention because I know of this Committee's keen interest in international economic issues such as these. For several years, the Congress has tended to look at the Commerce Department's trade role as being principally export promotion, and has not yet given priority to funding the Commerce Department's Market Access and Compliance functions. For several years the Congress has provided substantially less funding for this function than has been requested in the President's budgets. In fact, since 1996, our Market Access and Compliance unit has been underfunded by a total of $14 million from the Administration's requests -- or about 20 percent of the total resources spent on this function. The consequence has been a shrinkage in the amount of staff we have been able to apply to market access, monitoring and compliance. The EU Affairs unit that deals with the issues that are discussed today has shrunk from 11 to 6 people.

The President's budget proposal for FY 2000 seeks to remedy this situation and places a higher priority on compliance and enforcement of our trade agreements. I commend to your attention the Market Access and Compliance budget initiative, as adequate funding for access and compliance will pay dividends in increased exports.

The Commerce Department's Trade Development unit, which addresses industry-specific trade and commercial issues, including such critical U.S.-EU issues as 3G wireless and data privacy, also must be fully funded to ensure that we address industry concerns. This is especially crucial as we consider a new trade round under the WTO where Commerce is a key member of the interagency negotiating team led by the Office of the U.S. Trade Representative.

Let me close by emphasizing that the U.S.-EU relationship is too important to allow it to languish. The U.S.-EU commercial relationship is key to both our international trade strategies. Not only is our bilateral commercial relationship the largest worldwide, the United States and the EU also are partners in working for liberalized trade and investment throughout the world -- in Asia, Latin America, and in Africa. Without our strong joint leadership, much less would be accomplished in multilateral fora to advance the trade agenda. The broad contacts developed

with EU member states and with the private sector in the new Dialogues like the TABD broaden our ability to contribute to trade liberalization.

Accelerated work under the NTA over the past three years has brought about some impressive successes, such as the conclusion of the U.S.-EU Mutual Recognition Agreement, which cuts costs for U.S. business operating in the transatlantic environment. There is much work to be done on other important issues, such as genetically modified organisms, but I am optimistic that workable solutions can be found. I am especially pleased with work to develop early warning through government and private sector groups, such as the TABD, to keep our relationship on track. The relationship is simply too important for us to allow issues to go on without effective solutions that will address trade issues today and, over time, will actually strengthen the bond between our peoples.