Prepared Statement of

Ambassador David Aaron

Under Secretary for International Trade

U.S. Department of Commerce

Before the

Senate Finance Committee

Subcommittee on International Trade

October 21, 1999

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to appear before the Subcommittee today to discuss the critical role played by the services sector, an area which is gaining increasing attention in the run-up to the Seattle Ministerial November 30- December 3, 1999. In Seattle, the United States will host the largest trade event ever held in the United States, bringing together leaders from government, business and non-governmental organizations, to focus attention on our international trading system. The new round of global trade negotiations is important for determining how the United States and our trading partners will trade and compete in the world economy and for securing gains for American workers in the 21^st century.

In the upcoming World Trade Organization (WTO) negotiations, 134 Members of the WTO will meet to negotiate in three key areas: agriculture, industrial goods (tariff and non-tariff barriers) and services. Ambassador Barshefsky and Secretary Glickman, in previous testimony before the Finance Committee, described the critical role of agriculture in the upcoming negotiations. Clearly, we must remove trade barriers which prevent American farmers from competing fairly in world markets. Greater liberalization in industrial goods trade is also an important component of the next trade round.

The services negotiations in the General Agreement on Trade in Services (the "GATS 2000" round) will address the vital services sector as part of the "built-in" agenda from the Uruguay Round. In services, American industries are the most competitive in the world, as demonstrated by our $246 billion in exports last year, excluding government and military sales. (Please refer to the attached charts and tables submitted for the record that describe services trade and the U.S. economy.) I would like to first discuss the vital role of services in the economy, both domestically and internationally. I would then like to focus on the efforts of the Commerce Department, particularly in key services sectors, including distribution services, energy services, express delivery, and education and training services. Finally, I would like to discuss objectives for the upcoming negotiations.

We are working very closely with USTR on these issues, coordinating our efforts and analysis in order to present the strongest possible positions in the next round. The Secretary, through his National Trade Education Tour, has been working intensively with all stakeholders to form a domestic consensus for trade which is so essential to continued trade liberalization in all sectors. The Commerce Department is also working hand-in-hand with USTR and other agencies and with the business community, conducting extensive outreach through our Advisory Committees as well as in-depth roundtables with services sectors that include architecture and engineering services, distribution services (retailing, franchising and wholesaling), education and training services, energy services, express shipping services, and others. These business outreach efforts will continue throughout the GATS 2000 round so that our trade officials can negotiate the best possible agreements to liberalize global services trade well into the next century.

The Role of Services in the Economy

At the close of the 20^th century, America, and much of the world, is experiencing economic growth, rising wages, high-skilled job development, and increased exports of goods and services - all in a world which is increasingly connected and interdependent. An open international trading system, sustained over the last 50 years by the General Agreement on Tariffs and Trade (GATT) and now the WTO, has provided remarkable benefits to the United States and the rest of the world. Since the beginning of the GATT in 1948, world trade has grown 15-fold and tariffs have been reduced by 90 percent. Where the trading club was once limited to a handful of developed countries, the WTO now comprises 134 members - most of them developing countries.

Exports have driven the U.S. economic boom in the 1990's, providing nearly one-quarter of our economic growth since 1991. The United States is the world's largest exporter, with $934 billion in exports of goods and services last year. About 12 million American jobs are supported by exports - jobs which pay significantly more than the average. America has experienced almost a decade of economic expansion - the longest peacetime expansion in history. Employment is at record levels, with 19 million new jobs created, and inflation is at the lowest level in a generation.

Behind this strong performance, and providing a foundation for future growth and prosperity, are our dynamic services industries. At the end of the last century, the world was at the peak of the "industrial age," and as we enter the 21^st century, we have moved to an "information age," where the success of nations and the prosperity of people will be determined by being able to compete globally in high growth, value-added sectors. Services, from sophisticated healthcare services such as telemedicine to education and training services provided over the Internet, will be the critical component in providing economic stability and vitality in the next century. Services trade has become the engine of growth. Services make up the bulk of jobs in modern economies, and services inputs have become the critical factor to competitive success in manufacturing and in overall economic activity.

With the critical role played by services trade, why is there so little attention paid to services? Services could earn the Rodney Dangerfield "no respect" title! Part of the reason is that services are "invisible" - it's difficult to point to a services export the way one can identify an automobile or steel export. Even so, the services sector is the most dynamic force in our economy, covering a wide range of industries including banking and insurance, travel and tourism, entertainment, distribution (retailing, wholesaling and franchising services), legal and other business services, information, telecommunications, healthcare, education, transportation, energy and environmental services.

Infrastructure services -including telecommunications, transportation, financial, information, and distribution services-- underpin all forms of international trade and all aspects of global economic activity. Efficient transport and distribution systems help farmers get products to market without spoilage and ensure that manufacturing components reach the factory in time. Open and competitive financial services markets provide cheaper capital and allocate it more efficiently to support economic growth. Legal and accounting services give businesses the contractual framework in which to function and afford protection to consumers. Energy services -- including transportation, distribution and storage services -- promote competitive energy markets, provide affordable energy for industrial, commercial and residential customers, and stimulate economic growth. Telecommunications, software, and information dissemination are essential to the functioning of all modern industries. And the rapid development of new technologies, including the Internet and electronic commerce, promises a vast increase in the efficiency and productivity of services industries and, importantly, substantially increases the potential of all economies to participate in world trade.

While services are an extremely important part of our economy, they have lagged behind goods in terms of global trade liberalization. In 1998, services industries provided over 86 million U.S. jobs and accounted for 78 percent of private sector output. Service sector jobs are expected to account for virtually the entire net gain in employment over the next decade. The dominant role that services play throughout the U.S. economy translates into leadership in technology advancement, growth in skilled jobs, and global competitiveness.

Private U.S. services exports have more than doubled over the past ten years, rising from $117 billion in 1989 to $246 billion in 1998. Last year, we had a services trade surplus of $83 billion, which offset 33 percent of the U.S. merchandise deficit. Services are helping to spur the global economy as well. Global services trade -- approximately $1.3 trillion annually -- accounts for more than 22 percent of world trade and more than one in every seven dollars of global production. Many have argued that a more liberalized global services system (particularly in financial, insurance and telecommunications services) may have lessened the effects of the Asian financial crisis of the past two years. This is an important point to reinforce with the developing countries, many of whom were affected by the financial crisis, as we begin our negotiations in the GATS. A more integrated and liberalized global services system will provide a source of stability throughout the world economy.

U.S. services compete successfully worldwide. Major markets for U.S. services exports include the European Union ($87 billion in 1998 exports), Japan ($32 billion) and Canada ($20 billion). At $12 billion last year, Mexico is currently the largest of the emerging markets for U.S. services exports. Strong and expanding new markets for U.S. services, importing over $1 billion in U.S. services each year, include Argentina, Brazil, Chile, and Venezuela in this hemisphere, and in Asia, China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. In 1997, South Africa became the first country in Africa to import over $1 billion per year in U.S. services. These foreign markets offer excellent prospects for future export expansion and for creating new jobs for U.S. services companies. And we have just begun to tap these markets.

WTO Services Negotiations: GATS 2000

With this understanding of the services sector's vital and ever expanding role, both domestically and internationally, achieving concrete results in the next WTO round becomes even more important. A new round of services negotiations is mandated in the GATS, the first multilateral agreement for services, concluded as part of the Uruguay Round in 1994. While the GATS established a framework for rules applicable to trade in services and used most-favored-nation (MFN) treatment as its standard, the Uruguay Round negotiations did not bring about the kind of broad-based, significant services trade liberalization necessary for open and competitive services trade. Many countries made only a limited number of specific commitments, frequently only "standstill" commitments rather than expanded market access. Commitments were made in telecommunications and financial services following the Uruguay Round.

The new GATS round offers an excellent opportunity to liberalize a broad range of services sectors and to create an open international services trading system that will continue to provide growth and prosperity for the 21^st century.

The primary objective of the GATS 2000 negotiations is to liberalize trade in services, by expanding market access and broadening and deepening services commitments made by WTO members. This means making improvements in the schedules of specific country commitments in each of the 150 or so services sectors and sub-sectors. U.S. objectives for improving the schedules of specific commitments focus on:

• Increasing the number of industry sectors listed in each country's schedule;
• Extending coverage of commitments to all segments of the sector. For example, we would seek to ensure that commitments in construction services apply to the whole sector, not just to the construction of off-shore oil platforms;
• Deepening the scope of existing commitments. For example, removing limitations like caps on foreign equity ownership that restrict market access and national treatment for U.S. companies; and

4) Promoting regulatory reform among our trading partners, so that domestic regulations do not undermine the value of our partner's commitments.

Another important objective for the negotiations is to promote increased transparency among all WTO countries. Transparency requires that countries publish their rules and regulations, so that service providers can comply with stated requirements. Transparent procedures would also require notification in advance of proposed changes in rules and regulations and, in most cases, provide an opportunity for companies to comment. Greater transparency serves several important functions. It increases predictability by expanding the flow of information, which is crucial for creating a favorable business climate.

Equally important, greater transparency in WTO proceedings would help dispel the perception that the WTO operates "in secret", without sufficient accountability. Greater transparency will increase accountability which, in turn, should expand public support for global trade liberalization efforts in GATS and other WTO negotiating groups.

Furthermore, the United States wants to be certain that the new WTO round will avoid restricting the development of new technologies for use in delivering services, such as colleges that can operate over the Internet, home entertainment products delivered by satellite, and healthcare services delivered via telemedicine. We also want to ensure that the new round prevents discrimination against particular methods of delivering services, such as electronic commerce and the right of establishment.

Having outlined a number of objectives for the new round, I think it is important to highlight specific trade barriers that U.S. services companies face in foreign markets. This will provide some understanding of the challenges we will face in the upcoming negotiations.

Electronic Commerce and the WTO

The Internet and electronic commerce are central to continued economic growth in United States and around the world. The information technology companies now account for one-third of U.S. economic growth. In the United States, e-commerce totaled just over $50 billion in 1998, and it is projected to reach $1.4 trillion by 2003. By 2006, almost half of the U.S. workforce will be employed by industries that are either major producers or intensive users of IT technology, according to a recent DOC study. Worldwide, the number of people using the Internet has grown from 3 million in 1995 to 200 million users today, and may reach nearly 1 billion by 2005.

Our goal at the WTO is to insure that the Internet continues to be an engine of economic prosperity in the United States and around the world. Specifically, the United States is seeking to extend the 1998 moratorium on customs duties on electronic transmissions, ensure that WTO members take no action to inhibit the growth of e-commerce, and ensure that developing countries benefit from the expansion of e-commerce.

While we believe there is a role for the government in working out the complex issues associated with the development of e-commerce, we think our biggest challenge will be to resist the temptation to interfere with e-commerce's vast potential. The European Union has not proposed outright to impose duties, but it has made its support for continuing the moratorium contingent on WTO adoption of nine ambitious principles, which could pave the way for duties in the future.

For example, one of the EU principles would label all electronic deliveries as "services." Many countries including Japan and the United States do not agree. For one thing, this would extend the audiovisual prohibition on cultural grounds to software and items delivered by electronic means. Another EU proposed principle would begin the process of extending regulation to the Internet worldwide. The United States and others in the world reject this as a dangerous precedent. It could lead to restrictive regulation by individual governments that could seriously threaten e-commerce. Whatever rules that may be required can largely be accomplished using international fora such as the Organization for Economic Cooperation and Development (OECD) and the World Intellectual Property Organization (WIPO), as well as self-regulatory mechanisms such as the Global Business Dialogue on Electronic Commerce. Building consumer confidence is a priority for the success of electronic commerce and the Internet. But this should be accomplished through international agreements and self-regulatory mechanisms.

Trade Barriers that Impede Services Trade

With goods trade, barriers typically exist at the border, in the form of tariffs and non-tariff barriers, such as standards and licensing procedures. These barriers have been greatly reduced or eliminated in the trade negotiations rounds conducted in the GATT and the WTO. By contrast, trade barriers in services are less apparent, often embedded in a country's domestic regulations. Common barriers to services trade include restrictions on the establishment and operation of a commercial presence by foreign firms, limitations on foreign ownership, and requirements that economic needs be met as a condition to establishing a local subsidiary or branch (a so-called "economic needs test"). Additional trade barriers include the lack of transparency in the requirements for acquiring permits and licenses.

Let me illustrate some of the trade barriers that services companies face in overseas markets:

• In Asia and Latin America, U.S. insurance firms encounter non-transparent regulations, informal government guidance, and obstacles to the introduction and approval of new products, that limit market access and competition.

• Throughout Asia, U.S. services providers of all types must confront highly restrictive investment laws, lack of transparency in administrative procedures, and arbitrary application of regulations and laws.

• U.S. telecommunications services providers cannot compete on a fair and non-discriminatory basis when countries fail to adopt regulatory policies that break up inefficient state-run companies and fail to promote competition in international services.

• Subscription television service providers face numerous barriers to market access, such as numerical limits on channels, investment restrictions, content quotas, local uplink requirements, advertising prohibitions, and piracy of satellite signals.

• Express delivery firms have expressed concern with their inability to wholly own or control express firms in Asia, obtain courier licenses, truck licenses, customs brokerage licenses of bonded warehouse licenses and to self handle their aircraft.

• Medical services such as telemedicine and remote diagnostics, which have recently emerged as cost-effective alternatives to the maintenance of expensive facilities, can be subject to limitation as roughly one-third of GATS members generally did not make commitments in these services.

• U.S. energy services firms have experienced market entry difficulties such as restrictive regulatory practices, markets closed to private investment, requirements that firms purchase energy sources from one supplier, high licensing fees for foreign firms, and restrictions on mobility of business personnel, all of which severely restrict market entry.

The Commerce Department's Role in Services 2000

The Commerce Department has taken a leading role in the government's industry outreach efforts to determine the market access priorities and objectives for services industries in the next round of trade negotiations. We have been working directly with representatives of hundreds of U.S. services companies. Our overall outreach message has gone out to over 7,000 services providers and their representatives nationwide. Many of these companies are small and medium sized enterprises that comprise the majority of the services sector. We launched our outreach at the Commerce Department-sponsored conference and dialogue, "Services 2000," held a year ago this month. At this conference, industry made clear that it wants the negotiations to produce liberalization of services trade. There was also agreement that definitions of many services sectors need to be more descriptive and precise, which would enhance GATS negotiations.

Necessary preparations for the services negotiations will require knowledge of foreign barriers and industry's needs, sector-by-sector and country-by-country. To meet this need, the Commerce Department's Office of Service Industries organized over 10 industry-specific roundtables, and more are planned. At these roundtables, industry representatives from both services companies and trade associations meet with government officials to present their goals and objectives for the sector as well as to advise about specific barriers that impede their activities in foreign markets. Recent roundtables have covered distribution services, education and training services, energy services, express shipping (a type of courier services in the GATS terminology), healthcare services, hotel management and operations, and subscription television services. Upcoming roundtables will be dedicated to legal services, accounting and management consulting services, and architectural and engineering services.

The Department of Commerce also consults regularly with the two services-related Industry Sector Advisory Committees: Services (ISAC 13) and Wholesaling and Retailing (ISAC 17). The Department also works closely with leading services trade associations, such as the Coalition of Service Industries (CSI), the newly formed Energy Services Coalition, the American Council of Life Insurance, the International Insurance Council, and others that are aggressively organizing to meet the challenges and opportunities of the new round. Our business outreach efforts will continue throughout the round and will be important in shaping international trade agreements that meet the needs of services industries in the 21^st century.

We have already learned a lot from our interaction with industry at these roundtables. Industry has a strong interest in achieving liberalization in most services sectors. In express shipping, commitments are needed to cover most aspects of providing services, including intermodal transportation and trucking, distribution, warehousing, customs, telecommunications, logistics, brokerage, insurance and freight forwarding. In the energy services sector, industry is seeking coverage for a broad range of energy and energy-related services, including oil and gas development services, natural gas sales, transportation and distribution services, electricity project development, generation, transportation and distribution services, and mining services. In insurance, the industry would like improved commitments from a number of key countries.

In audiovisual services, primarily distribution of filmed entertainment, the United States would like to increase the number of commitments, and move these commitments much further towards free trade. In the Uruguay Round, only 13 countries made commitments in audiovisual services. In distribution services, industry has expressed concerns with such issues as customs clearance and trade facilitation, as well as local equity requirements in GATS schedules, which set caps on foreign investment. Distribution services companies want these equity caps eliminated. Finally, in education services, very few countries made commitments in the Uruguay Round. The United States would like to increase the number of commitments and their value to U.S. suppliers.

One thing that has not been stressed enough in previous rounds is the role of small business in global exports. We estimate that 97 percent of the over 209,000 U.S. enterprises engaged in exporting are small and medium-sized firms. We are, therefore, working to enlist the drive and creativity of America's small business sector in our work on the new trade round.

One important way to bring the advantages of trade to American firms and workers is to ensure that they obtain all of the benefits and opportunities intended by the trade agreements we have negotiated and by U.S. trade laws. Commerce's Trade Compliance Center is specifically designed to move aggressively when it encounters restrictions in access to foreign markets or violations of agreements or U.S. trade law. In short, we are moving forward on a number of fronts to help ensure the success of the next round and to meet U.S. objectives that will further strengthen U.S. economic and social health.

Conclusion

Meeting these important objectives and reducing global services trade barriers can best be advanced if we coordinate our positions both with U.S. services industries and with our major trading partners. Such coordination preceded the successful round of negotiations in both basic telecommunications and financial services. As an example of this type of coordination, the International Trade Administration will participate in the upcoming World Services Congress 1999 in Atlanta November 1-3, the flagship industry forum, to further coordinate with industry on services trade liberalization.

The upcoming Seattle Ministerial and the new trade negotiations round provide an excellent opportunity to make great strides in the liberalization of world trade, especially in services. It is crucial that the Administration, working together with the Congress, industry, labor, environmental and other NGO's, and our trading partners, takes full advantage of the possibilities of this new round. It should provide new opportunities for U.S. industry to compete around the world and for our workers to have access to the high quality jobs provided by international trade.

We anticipate that services will remain a crucial part of the U.S. economy and world trade. A successful new round will enhance this vital role.

I would be pleased to answer your questions.