Madam Chair, I am pleased to appear before this subcommittee today to discuss our commercial relationship with Latin America and what it means for the well-being of the U.S. economy. In many ways it is a story of present challenges standing in the way of future opportunities. Not only has the Latin region undergone a number of recent changes, many of which I will address, but we are also less than 50 days away from the opening of the Free Trade Area of the Americas (FTAA) Ministerial; a Ministerial which will bring us exactly half-way toward the completion of this decade long undertaking. It is the proximity to this event that makes this a timely hearing indeed.
Let me begin by putting U.S.-Latin American trade in perspective.
TRADE SNAPSHOT
Latin America is a major trade and investment partner for the United States. It is a natural commercial partner of the United States, tied closely to us by geography, history and culture. Today, Latin America, including Mexico, accounts for one out of every five dollars in U.S. merchandise exports, up dramatically from under 14 percent at the beginning of this decade. In fact, Latin America has been responsible for almost half of all U.S. export growth since 1995. Further, excluding Mexico, Latin America is the only region of the world where the United States has consistently run a large and growing trade surplus in the 1990s, reaching a record $13 billion in 1998.
Last year, American firms in thirteen U.S. states exported more than $1 billion each to the Latin/Caribbean region. Four states -- California, Florida, New York and Texas -- each had 1998 exports in excess of $4 billion to this region.
Unfortunately, even before Brazil's devaluation, the global financial crisis and lower commodity prices were having a dampening effect on economic growth in Latin America, and Hurricanes Georges and Mitch have taken a toll in the Caribbean Basin. While Latin America's economies collectively grew almost 5 percent in 1997, last year's growth was less than 2 percent. This region-wide downturn, coupled with significant currency devaluations in several markets, most notably an almost 40 percent devaluation in the Brazilian real against the U.S. dollar, have both dampened the demand for U.S. exports, while at the same time increasing their cost in dollar terms relative to domestically produced goods.
The slowdown is clearly visible in our trade performance. Excluding Mexico, 1998 marked the first time since 1986 that our total trade with Latin America declined, with our exports to the region flat and imports falling. For the year, U.S. exports to Brazil declined 5 percent, Chile 9 percent, Colombia 7 percent, and virtually all other countries within the region showed a reversal from recent double-digit export growth. Our balance-of-trade, although still in surplus at almost $900 million for the 1st half of 1999, has decreased dramatically by almost 90 percent from the same period last year.
Fortunately, recent reports indicate that the Latin downturn may be short lived, with growth returning to many of the countries in the year 2000.
Already Brazil has evidenced signs of a more rapid than expected recovery following its January devaluation. The government of Brazil is forecasting an overall trade surplus in 1999 of between $3.4 and 5.3 billion, although 1st quarter trade data indicate a much smaller surplus (probably around $1 billion) as Brazilian exports have increased less than initially hoped. Interest rates remain high, but they are far lower than the levels seen last fall and winter. Brazil has been lowering rates steadily since March (the prime lending rate currently stands at about 24%). Most observers predict that positive growth will resume by the end of the year. Several important sectors, such as transportation, telecommunications and agriculture, have continued to grow even during the recession.
Positive Brazilian growth should have a salutary effect, both on overall regional economic prospects and for a rebound in U.S. exports and investment. Brazil, after all, is the largest economy in Latin America, the 9th largest in the world and our largest South American trading partner accounting for more than $15 billion in U.S. exports last year. Its gross national product is nearly equal to that of the rest of South America combined. It is also a key market for Latin nations. Indeed, Argentina, the second largest economy in South America, sends roughly 30 percent of its exports to Brazil and has been severely affected by the Brazilian recession.
Moreover, the continuing recovery in Asia should provide an impetus for growth in other Latin countries. Chile is but one example. Mired in a recession for much of the past year caused by declining world prices for its primary export commodity -- copper -- and the contraction of Asian markets which account for almost 30 percent of Chilean exports, Chile has nonetheless appeared to weather the worst of its economic storm. Business confidence is returning and the longer term outlook for Chile's economy is positive. Export commodity prices are recovering, and after a year of very low or zero growth in 1999, the government of Chile expects a rebound to 5.5 percent growth in 2000.
CURRENT CHALLENGES
The Andean Community
But while growth is expected to return to the region, followed by an expected recovery in U.S. exports, I would be remiss if I did not mention several areas of nagging concern, where recent political and economic developments are continuing to dampen U.S. commercial opportunities.
The current period of turmoil in the Andean community bears close watch. Uncertainty in Venezuela, Colombia and Ecuador has exacerbated the downward trend in U.S. exports to the region -- down by almost one-third during the first six months of 1999 -- and caused a major decline in new investments.
In Venezuela voters have given President Chavez a mandate for sweeping changes in government, including the writing of a new constitution to reform the political structure of the state and the judiciary. The U.S. business community is concerned over what a new constitution may mean for foreign investment. The recent resignation of the head of the national oil company has not gone unnoticed by foreign investors in the energy sector. The situation is not helped by a weakening economy.
Colombia is also going through a difficult period of political and economic turmoil. Domestic insurgency and narcotics trafficking are serious problems. The situation is made more uncertain by the fact that Colombia is in its worse economic recession in decades, with unemployment over 20 percent and negative GDP growth expected for 1999. President Pastrana of Colombia has embarked on a comprehensive strategy to resolve Colombia's most pressing national challenges, and is seeking U.S. government support.
Ecuador is the third very troubled country in the Andean region. Ecuador's economic performance started to decline in 1998 following a drop in oil prices and the after effects of El Niño. Attempts to forge a bipartisan economic recovery plan have faltered. Although Ecuador and the IMF are working on a new economic program, it will require that a number of prior conditions be met before IMF board approval. GDP in 1999 is projected to fall about 5-7 percent.
Central America
The challenge in Central America rests on the successful recovery of the region following last year's devastating hurricane. The economic impact of Hurricane Mitch on the Central American countries was enormous, placing significant economic, social, and political pressures on the region's governments. This is particularly true in Honduras -- the country most significantly impacted by Mitch -- where the economy is projected to contract by 1-2 percent in 1999. The Central American governments have stressed that better access to foreign markets, debt relief, and financing to rebuild damaged infrastructure are essential for their economic reconstruction and modernization.
The United States, in conjunction with other Paris Club members and the multilateral development banks, has been successful in providing debt relief or debt restructuring for Honduras and Nicaragua and significant assistance for Central America reconstruction. We at the Department of Commerce have been especially active in the reconstruction effort. We have focused our efforts on assisting Central America develop programs which will insulate the region's private sector from the impact of future natural disasters, assist in improving climate prediction capabilities and the sharing of vital climate information among countries in the region, and work to ensure that U.S. companies are positioned to participate in the region's reconstruction efforts.
In support of these efforts we have organized and held a series of seminars in the United States aimed at disseminating information on the region's reconstruction plans, undertaken a Business Development Mission to the region in March led by Under Secretary for International Trade David Aaron, and are working with the U.S. insurance industry to develop a program which will make property and casualty insurance available to a larger segment of the local population. An important component to the region's ability to rebuild its economic capability and to lessen dependency on foreign assistance is the passage of legislation designed to enhance benefits of the Caribbean Basin Initiative. We support passage of this legislation.
Yet, even with the damage wrought by Hurricane Mitch, there continue to be bright spots within this region. The Central American countries have made significant progress over the past decade on strengthening democracy and liberalizing their economies. Trade liberalization, macroeconomic stabilization, and the introduction of private investment in previously state-owned enterprises have resulted in significant trade and investment opportunities for U.S. companies. The United States is Central America's most important trading partner and its largest foreign investor. Last year, U.S. trade with Central America (specifically Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua) totaled $17.6 billion, more than tripling since 1990. Economic liberalization and the successful resolution of the region's civil wars have also led to economic growth in the region throughout the 1990's: for example, Nicaragua's economy grew steadily throughout the 1990's, reaching a growth rate of 5 percent in 1997, the highest in Central America.
Increasing Competition
A key challenge we face is the significant increase in competition that U.S. products face within what has heretofore been a traditional U.S. market, one that has been responsible for almost one-half of all U.S. export growth since 1995. Latin American and Caribbean nations, strongly encouraged by the United States, have moved beyond their traditional closed markets to embrace greater market openness and increased competition. We have encouraged these changes, because they contributed to greater economic growth, expanded market opportunities, reinforced economic reform, and buttressed the emerging democratization of the region.
But at last count, more than 30 regional and subregional trade arrangements were active within the region without U.S. participation. Chile, for example, either has or is negotiating trade agreements with every democratic nation in the Western Hemisphere, except the United States, including free trade agreements with Mexico and Canada, and is now even entertaining overtures from Korea. In late June, Brazil announced agreement with the five members of the Andean Pact to reduce or eliminate tariffs on more than 2,800 products.
Other than with NAFTA partners, we are barely maintaining our share of the hemisphere's purchases, as U.S. exporters find themselves competing against firms located within the region that enjoy preferential tariffs that we do not. For example, in 1997, the American Chamber of Commerce in Chile identified more than one-half billion dollars in lost U.S. sales -- these were specific instances -- to firms situated in countries that had preferential trade agreements with Chile.
In addition, the European Union -- traditionally our strongest competitor in Latin America and especially in Mercosur -- is refocusing its attention on the region. Having watched the United States realize a seven point gain in import market share with Mexico in the 1990s -- largely at the EU's expense -- the European Union and Mexico are now negotiating a free trade agreement which they expect to conclude this year. We in the Market Access and Compliance (MAC) unit of the Department of Commerce are closely monitoring these talks to ensure that any agreement is consistent with obligations that Mexico undertook in NAFTA and with its obligations under the WTO.
A key EU objective on the trade front in Latin America is to achieve at least parity with the Free Trade Area of the Americas (FTAA). Many observers expect the EU's resistance to agricultural liberalization to be the stumbling block in these talks. Nonetheless, the Department's MAC staff will be vigilant to make sure that any agreements struck -- with either Mexico or Mercosur -- strictly comply with the WTO criteria of covering substantially all trade and raising no new barriers to third parties.
Market Access Concerns: Intellectual Property Rights
The sweeping political, economic and commercial changes that Latin nations undertook at the beginning of this decade are a key reason why the United States has enjoyed trade surpluses with Latin America during the 1990's. Those changes, involving unilateral tariff reductions, the privatization of previously state-owned enterprises and the dismantling of non-tariff barriers and import substitution policies, have ushered in a region-wide embrace of freer and fairer trade. Nevertheless, market access concerns have not disappeared and new issues, for example, the use of reference prices in Argentina and Brazil have appeared.
One of the Administration's key commercial concerns is the need for most countries in the Latin American region to reform their intellectual property rights legislation and enforcement regimes. They must do so in accordance with the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement prior to January 1, 2000. Patent, trademark, trade secret, and copyright enforcement regimes which fail to meet TRIPs standards are areas of particular concern.
The Department of Commerce plays a vital role in gaining redress for TRIPs violations that threaten U.S. goods, both through its intellectual property experts at the Patent and Trademark Office (PTO) and its trade and economic analysts located within the International Trade Administration (ITA). Indeed, MAC country experts monitor IPR related issues in the countries for which they are responsible and intervene either with on behalf of U.S. industry as warranted, including through the annual Special 301 review, where both advice and recommendations from PTO and ITA form a vital piece of the process.
Deficiencies in the patent systems of several key countries include broad compulsory licensing provisions, mandatory local manufacturing of the patented product, back logs of pending patent applications, and failure to provide exclusive marketing rights for pharmaceutical products as a transitional form of protection.
With regard to exclusive marketing rights, we have already held two rounds of consultations with Argentina regarding the absence of an effective system for providing such protection. A third round is expected imminently. Argentina also appears to be in violation of the TRIPs Agreement for revoking regulations in 1998 that had provided 10 years of protection for confidential test data for agricultural chemical products. TRIPs requires that WTO Members enjoying a transition period ensure that changes in IPR laws, regulations and practices during that period do not result in a lesser degree of consistency with the provisions of the TRIPS Agreement.
Improved and sustained enforcement of copyright legislation continues to be an outstanding concern for the U.S. government. Wide spread piracy of audio and video works, CD-ROMs, and cable TV exists in a number of countries at the retail and distribution levels. The situation is compounded by a lack of effective border controls, inconsistent enforcement and inadequate penalties.
Notably, the denial of adequate and effective protection for intellectual property rights in Paraguay led to a Section 301 investigation. In November 1998, we signed a comprehensive Memorandum of Understanding (MOU) with Paraguay on the protection of intellectual property which served as a basis for concluding the investigation. The Paraguayans committed to implement institutional reforms to strengthen intellectual property rights enforcement at their borders, to pursue legal amendments to facilitate effective prosecution of copyright piracy, to take immediate action against known centers of piracy and counterfeiting, such as Ciudad del Este, and to coordinate the anti-piracy efforts of their customs, police, prosecutorial and tax authorities. Despite positive steps taken by certain Government officials, much remains to be done to achieve full implementation of the MOU. Consultations with Paraguay on enforcement actions are scheduled for September 24.
FUTURE OPPORTUNITIES
Despite the aforementioned challenges, Latin America remains an area of significant opportunities. Economic recovery and a return to the status quo ante would in and of itself see a restoration of U.S. trade and investment. However, we hope to go significantly beyond a simple return to the way things were in our dealings with countries in the hemisphere. Let me briefly touch upon the potential of the Free Trade Area of the Americas. I also want to speak briefly about the Department of Commerce's role in monitoring compliance with negotiated agreements. This is a critical function that seeks to ensure that U.S. firms and workers will enjoy the expected benefits from any and all trade agreements.
The Free Trade Area of the Americas
Much has changed since the heads of state from the region's 34-democratically elected governments met in Miami in 1994 to announce agreement toward a Free Trade Area of the Americas by 2005. But much also remains the same, including the impetus behind that hemispheric consensus -- that a comprehensive FTAA, comprising the world's largest free-trade zone, would offer unparalleled opportunity to businesses, farmers and working families, and strengthen the hemispheric move toward open markets under the rule of law.
Today we stand at the half-way point in this effort. And despite the gloomy economic forecasts for 1999, we see little evidence that the region is any less committed to completion of the FTAA on schedule as it was in 1994. We have an ambitious agenda for the remainder of the year including:
The next FTAA Ministerial meeting will take place November 3-4 in Toronto, Canada. The Ministerial will be preceded by an Americas Business Forum (November 1-3) and a Civil Society Forum, both being organized by the Canadian private sector.
Given the mandate to "achieve concrete progress by the year 2000", Vice Ministers have agreed to recommend a package of nine customs and several transparency business facilitation measures to be implemented beginning on January 1, 2000. The customs measures will result in more efficient customs processing for express shipments, for low value shipments, and for business related materials (such as promotional materials) and equipment. The transparency measures will take advantage of the Internet to make available information on the FTAA countries' trade laws, regulations and procedures. We anticipate that a full package of business facilitation measures will be announced by Ministers at the upcoming FTAA Ministerial in Toronto. This should provide needed impetus to the negotiations as we move toward their timely and successful completion.
We do not believe that we can engender the type of support the 34 governments will need to get the FTAA approved if we ignore our constituents or keep the process isolated. Public support and participation will be enhanced by a Committee on Civil Society which is -- for the first time in any trade negotiation -- providing a formal mechanism for labor, environment, business and consumer groups, as well as other non-governmental organizations to make recommendations to Trade Ministers. From the outset, these talks explicitly recognized the need to do a better job in ensuring that all citizens perceive and identify with the benefits of trade.
As we open trade, we need to look into the future, to areas that will be of greater importance a decade from now. There is no doubt that electronic commerce will be a major channel for trade in the free trade area we are constructing. At the Commerce Department, we have been spending a considerable amount of time dealing with the variety of policy issues that arise from the explosion of electronic commerce and working with foreign governments to make electronic commerce a truly seamless global marketplace. Through the FTAA Joint Public-Private Sector Experts Committee on Electronic Commerce -- chaired on the United States side by the Commerce Department -- we are increasing the hemisphere's knowledge about the kinds of policies that promote electronic commerce and the potential benefits of electronic commerce. For this potential to be realized, governments must adopt a market-oriented approach to electronic commerce, one that facilitates the emergence of a global, transparent, and predictable environment to support business and commerce.
Trade Agreements Compliance and Monitoring
A critical function that we in the International Trade Administration provide is ensuring that foreign governments comply with those trade agreements to which they are a signatory. We work diligently to assure Americans that the agreements we negotiate are honored and that American firms and workers obtain the benefits and opportunities intended. It is also one of the best ways to help create confidence among business, labor, and the general public that trade agreements work and create new business and employment opportunities. Hence, trade agreements compliance and enforcing our trade laws are a priority throughout the International Trade Administration in the Commerce Department. Our Trade Compliance Center coordinates our compliance activities but all our country market access officers, our industry experts, as well as our Commercial Service officers overseas, are involved.
We have tailored much of our work to smaller companies, because they lack the time and resources to deal with foreign governments -- or our own government -- on trade barriers. This is a critical function with respect to MACs monitoring of regional trade agreements. We want to ensure that future preferential trade agreements, either wholly within the region or with third parties (e.g., the EU - Mexico or EU - MERCOSUR), are negotiated in a manner that does not raise barriers to U.S. exports.
And indeed, it is a vital feature of our day-to-day operations. For example, we are presently examining several Brazilian practices that appear to impede U.S. exports of medical devices. We were contacted by a distributor of medical devices manufactured by small and medium-sized U.S. firms who sought our assistance to reduce Brazil's high registration fees for medical devices and simplify the complex and frequently-changing registration process. We are consulting with industry and our Embassy in Brasilia to develop accurate information on Brazilian practices and an appropriate action plan aimed at redressing the company's concerns.
Before closing, I want to again thank the Chair and other members of the Subcommittee for your appreciation of the critical work accomplished by the Market Access and Compliance (MAC) unit of which I am a member. We in MAC are working together as a unit to ensure full access to foreign markets for goods produced by American firms and workers and to achieve full compliance by our trading partners with the trade agreements they have signed. Our efforts in this regard will be significantly enhanced if we can obtain the increase in funding requested for us in the President's FY 2000 budget. This will considerably strengthen our efforts to help U.S. firms, particularly the small- and medium-sized firms, that otherwise lack a concerted voice in the international trade arena.
Conclusion
In conclusion, as I indicated earlier, 1999 has been a year marked by challenges in Latin America. We think that the year 2000 will witness the overcoming of several of these challenges as economic growth returns to the region, followed by an expected upswing in U.S. exports as we move closer toward the successful completion of the FTAA.
Thank you and I will be pleased to answer any questions.