Testimony of Grant D. Aldonas

Under Secretary of Commerce for International Trade

Hearing of the Senate Finance Committee

Missoula, Montana

June 1, 2001

Senator Baucus, I want to thank you for holding this hearing of the Senate Finance Committee and for inviting me to join you here. I know from personal experience the tremendous leadership you have provided on international trade issues of importance to Montanans and to American farmers, workers, and businessmen and women across the country.

You have put your personal stamp on every significant piece of trade legislation that Congress has passed in recent years. I would like to say, both personally and on behalf of President Bush and Secretary Evans, how much we are looking forward to working with you, Senator Grassley, and your colleagues on the Finance Committee in pursuing a trade agenda that serves the interests of all Americans.

It is a particular pleasure to be here amidst the beauty of Montana. Coming originally from Minnesota, I find I am always happier west of the Mississippi than I am back East. In fact, when I was a lot younger, I used to hop a freight train or hitch-hike out Interstate 94 heading west for Montana to work day labor in the national parks and hike the Rockies.

I had the opportunity to retrace some of my steps these last two days as we drove up to the border at Secretary Evans' direction to check in with U.S. Customs officials monitoring the imports of Canadian lumber and to visit a sawmill in Eureka.

Montana's Role in World Markets

When I think of Montana, I think immediately of the state's farmers and cattlemen. Both can take pride in being key players in global markets for their products. According to the U.S. Department of Agriculture, Montana's agricultural exports totaled $228 million in 1999. Since 1991, the state's reliance on agricultural exports has ranged from 13 to 44 percent as measured by export's share of farm cash receipts. Montana's top agricultural exports include wheat and wheat products, feeds and fodders, feed grains, live animals and red meats, and planting seeds.

Montana's exporters would benefit greatly from expanded efforts to open up world markets. While progress has been made under the North American Free Trade Agreement (NAFTA) and the Uruguay Round, U.S. agricultural exports - bulk commodities and especially processed foods and other grocery items - still face high tariff and nontariff barriers in Asia, Latin America, and other potential markets. Negotiations toward a Free Trade Area of the Americas (FTAA) would provide the opportunity to address these barriers in our hemisphere, complementing broader efforts in the World Trade Organization (WTO) agriculture negotiations to open up global markets and further liberalize international agriculture trade.

According to Census Bureau statistics, businesses located in Montana exported over $550 million worth of merchandise last year. While Montana's state flag highlights the importance of agriculture and mining (exporting nearly $120 million in nonferrous metals and $13.7 million of metal ores in 2000), the story of Montana's access to world markets reaches well beyond those sectors. In 2000, for example, Montanans exported more than $110 million in machinery, $24 million worth of navigational, measuring, electromedical and control instruments, over $6 million in cement products, and $5.1 million in computer equipment. The latest available data indicate that manufactured exports support at least 5,900 Montana jobs and sustain roughly one out of every 10 workers in the state's manufacturing sector. As far as manufacturing is concerned, export prospects appear bright - especially if the Administration can move forward and negotiate reductions in remaining foreign barriers to Montana's exports of industrial machinery, information technology, metal products, and chemicals.

Services play an increasing role in the Montanan economy. The Mountain region of the United States is a popular area for tourism, attracting 1.2 million overseas visitors in 2000. International travel and tourism to the United States generated over $106 billion in 2000, and Montana's beauty is a natural draw.

Another point I would like to make is that exports have broadly benefitted Montana's businesses - both large and small. A total of 730 companies exported goods from Montana in 1998. Just over 80 percent of these exporters, accounting for 31 percent of total exports, were small- or medium-sized companies that had fewer than 500 workers. In fact, more than 70 percent of Montana's exporters were small firms with less than 100 employees.

The Commerce Department's Role in Promoting U.S. Trade

As Secretary Evans reminded me before coming out here (and reminds me regularly back in Washington), my main job is to be an advocate for Montana's exporters and U.S. exporters generally. That advocacy takes a number of different forms.

On the top of that list is ensuring that our trading partners comply with our trade agreements. Nothing is more dispiriting to our farmers, workers, and entrepreneurs than the sense that they are not receiving the market access we bargained for in various trade agreements. We cannot expect their support for an aggressive trade agenda going forward if we are not ensuring compliance with commitments made in the past.

The next item on my list of priorities is expanding export opportunities for American business, both through the negotiation of new commitments on market access and through trade promotion. I am extremely fortunate to be working with the professionals in the Commerce Department's International Trade Administration who have a long and successful record on both counts.

Within the International Trade Administration, the staff of the Office of Trade Development, which is an organization of industry-specific trade specialists, plays an integral role in setting the agenda for our trade negotiations and in support of our negotiators in the Office of the U.S. Trade Representative. There are also a number of areas, such as disciplines on foreign unfair trade practices, such as subsidies, where the Commerce Department takes the lead.

On the trade promotion front, my job is to make sure that our exporters, and those individuals and firms looking to export markets for the first time, are aware of the tremendous resources available to them at the Commerce Department. Last night, I had the great pleasure of meeting with the staff of the local U.S. Export Assistance Center (USEAC) and the members of the District Export Council here in Missoula. They can provide a vital link back to the Department, where there are a number of forms of assistance available to our exporters. They also provide a link to our Commercial Service officers, whose main role is to identify export opportunities for American business and link American firms with those opportunities.

Let me close this bit of advertisement for ITA's services by highlighting the Department's role in the promotion of our agribusiness trade in particular. I do so because our farmers often look to the Agriculture Department as their primary point of contact in the U.S. government.

What our farmers and agribusiness firms may not realize is that the Department has an Advocacy Center that provides all U.S. exporters with a unique, central point for marshaling all the resources of 19 U.S. government agencies to ensure that sales of U.S. products and services have the best possible chance abroad. The Department's Trade Information Center provides a "one-stop-shop" for information on U.S. government resources designed to facilitate their export transactions.

Our Commercial Service officers, whom I mentioned earlier, are located in 105 offices in cities throughout the United States, and in 160 locations in 85 countries abroad. Our Montana USEAC has helped companies such as SkySource International, a Billings-based aircraft sales and management company, which participated on a trade mission to Latin America led by Senator Baucus and subsequently entered into a joint venture with a Chilean company. Our Montana USEAC also works with companies to let them know when circumstances are not ripe for international deals. For instance, Windbreak, a small Bozeman manufacturer of outdoor blankets, was contacted by an overseas company. Our Montana USEAC checked with our Commercial Service office in that country and determined that the foreign company had made false claims. We want to help our companies take advantage of the right opportunities.

The Commerce Department's Role in Addressing Foreign Unfair Trade Practices

In addition to the role that the Commerce Department plays in promoting our exports, the professionals in ITA's Import Administration are ready to assist our exporters and domestic producers when foreign governments try to unfairly tilt the playing field in favor of their exporters. Import Administration administers both the antidumping and countervailing duty laws.

Congress designed the antidumping laws to ensure that our producers in the United States were not undercut by foreign exporters dumping their goods here in the U.S. market. Although the law focuses on dumping by individual firms, it is often the case that some government action lies behind the ability of foreign firms to sell into our market at prices that may not cover their operating expenses, much less provide a normal rate of return on their capital.

For example, when a government keeps its own markets closed, it guarantees its producers a higher rate of return than they would otherwise receive in fair and open international competition. The net result is that those firms can often afford to subsidize their sales into the U.S. market.

Similarly, Congress designed the countervailing duty laws from the start to combat subsidies paid by foreign governments to assist their exporters. What Congress understood as far back as 1890, when it introduced the original countervailing duty law to combat production subsidies paid by the Tsarist government to Russian sugar exporters, was that the effect of a protective tariff or an outright grant of cash to a foreign producer was the same. It allowed the foreign exporter to sell his products at a lower price on the U.S. market because the foreign government was assuming (or forcing others to assume) a part of the producer's cost of doing business.

The job of our professionals in Import Administration then is twofold. First and foremost, they are responsible for investigating claims by U.S. industries producing a like-product that goods exported to the United States are unfairly dumped or subsidized. I pledge that those investigations will be conducted fairly and impartially.

But, the second part of Import Administration's job is also very important: That is to use the leverage of the antidumping and countervailing duty actions to persuade foreign governments to eliminate the underlying unfair practices.

In that regard, let me reiterate something I said to you recently about how Secretary Evans and I intend to approach the administration of the U.S. trade remedy laws. I want to underscore the fact that we view these laws as an essential part of the bargain on trade.

We negotiate market access for our exports and open our markets to imports on the assumption that the trade will flow according to the laws of the marketplace, not based on which government intervenes to tilt the playing-field in their exporter's direction. And Congress intended our trade remedy laws to ensure that our basic assumption about free and fair competition prevails.

It also is important to note, however, that if we find that either dumping or subsidies exist, we will always look to solve the root of the problem. We must eliminate the underlying government action that affords advantages to certain players in the marketplace at the expense of others.

U.S.-Canadian Trade in Lumber

That brings me to the central reason for this hearing - the current or, perhaps more accurately, the continuing friction between the United States and Canada over the trade in lumber. U.S. and Canadian lumber producers have been competitors in lumber markets since they fought over contracts for ship spars for the British and American navies and the maritime fleets of New England in the late 18th Century. In fact, the friction over the lumber trade has essentially followed the entire course of the westward development of both the United States and Canada from Maine and the Maritimes to Minnesota, Michigan, Ontario, and Manitoba to Montana and the Pacific Northwest and the Western Canadian provinces of Alberta and British Columbia.

Today, producers in both countries compete in what is essentially a single, integrated North American market for lumber. That market is driven largely by housing starts and construction in the United States and Canada. And, the demand (and the appropriate rate of return) for timber is always driven by the demand for the downstream product, lumber.

With more than 23.2 million acres of prime forest land covering the state, both the State of Montana and Montana's lumber industry have a major stake in ensuring that the rules that govern the lumber market provide for free and fair competition. Both Secretary Evans and I understand the importance of this issue to the state of Montana.

From the State's perspective, unfettered (and unsubsidized) competition in the lumber market will provide the highest rate of return on timber harvested from state forest land. That in turn affects the revenues available for administering those forests for the benefit of all Montanans, not just the lumber industry. Market prices unaffected by subsidies also help forest managers make judgments about where and how to invest scarce public resources.

That same calculus holds true, of course, on federal forest lands. The United States government has the same stake as Montana does in ensuring that the competition in downstream markets for forest products is open and fair.

In the last 20 years, the U.S. lumber industry has filed a series of countervailing duty actions alleging that, between the Canadian federal government and the various provinces (which actually hold the rights to much of the timber), Canadian lumber producers have benefitted from substantial subsidies. Those cases have led the United States and Canada to negotiate agreements on lumber trade that have had the effect of segmenting the market but did not attempt to address any of the U.S. industry's underlying complaints regarding Canadian, and particularly provincial, timber practices.

Lapse of the 1996 Softwood Lumber Agreement and the Initiation of Antidumping and Countervailing Duty Actions

The most recent of those agreements, the 1996 Softwood Lumber Agreement, lapsed at the end of March of this year. On April 2, the U.S. industry filed petitions alleging countervailable subsidies, and, for the first time, dumping of Canadian softwood lumber.

Having reviewed the petitions, we initiated full investigations of those allegations a little over a month ago, on April 23. We are currently collecting information which we will analyze to determine if softwood lumber imports have been unfairly subsidized and/or sold at dumped prices.

Given the quasi-judicial nature of the procedures involved, I do not intend to address any of the specific allegations set out in the industry's petitions. What I do want to stress, however, is the importance we in the Administration attach to working with you and the industry to ensure that the cases are fully and fairly investigated.

We have assigned a seasoned team of case analysts under the direct supervision of the Assistant Secretary for Import Administration, Faryar Shirzad, to ensure that investigations are conducted in full compliance with our trade remedy laws. Senator Baucus, you and the members and staff of the Finance Committee know Faryar well and will understand my complete confidence in his investigation of these allegations.

I should add a word about the timing of the initial determinations in these cases. If we adhere to the current schedule, the Department would issue a preliminary determination in the countervailing duty investigation on June 27, and a preliminary determination in the dumping investigation on September 10.

Those deadlines would only be extended if the issues prove extraordinarily complex. I do, however, intend to ensure that the Department takes the time necessary to analyze fully the information the U.S. lumber industry puts on the record and any responsive information provided by the respondents.

Import Monitoring and the Effect of Any Surge in Imports Prior to Preliminary Determinations

Normally, if the preliminary determination in either an antidumping or countervailing duty case is affirmative, we will direct the U.S. Customs Service to begin collecting cash deposits or bonds equivalent to the preliminary subsidy or dumping margins on imports of the affected merchandise. That same rule would apply in the event of such a determination in the case of imports of softwood lumber from Canada.

I want to stress, however, that the Department could order the Customs Service to apply those cash deposit requirements to imports from Canada made prior to the date of the preliminary determinations if we find that a surge of imported lumber has, in the meantime, created what the law refers to as "critical circumstances" for the U.S. petitioning industry.

The reason I want to underscore that point is straightforward. Both Secretary Evans and I are well aware that both exporters and importers of lumber from Canada will be tempted to rush as much lumber across the border as possible before the Department reaches its preliminary determinations, a rush that could have an undesirable economic - not to mention environmental - impact. That is why, in direct response to expressions of interest from you, Senator Baucus, and other members of the Senate, the Secretary ordered us to establish a Lumber Import Monitoring Program that allows us to monitor imports of lumber from Canada on a daily basis.

We have been using a number of methods to ensure that we have the most current information available regarding the level of lumber imports. Under the program, we have been reviewing import data, trade publications and working with Customs officials to look for any signs of an import surge. When I told Secretary Evans I would be traveling to Montana, he asked me personally to visit the border to see how well our monitoring program was working. That's what took me yesterday to the Roosville Customs port in Eureka, Montana, and I expect that high-level Commerce Department officials will be visiting other U.S. Customs ports of entry to continue tracking lumber imports.

The Secretary has discussed the trend in lumber imports regularly with his counterpart, Pierre Pettigrew, Canada's Minister for Foreign Affairs and International Trade. I want to stress that we have had the complete cooperation of the Canadian government in this monitoring effort. The Canadian government left in place the export licensing requirements it had installed under the 1996 agreement in order to ensure that it had the means separately to monitor Canadian exports of lumber to the United States.

While both the Secretary and I appreciate the cooperation we have received from the Canadian government, it is clear that the measures Canada has taken are in its own best interest. That is because Canadian officials understand as well as we do how any surge in lumber imports in response to the filing of the U.S. industry's petitions would only exacerbate the current friction over our lumber trade. It would also prove counterproductive, as I have explained, because it could lead to the earlier imposition of any applicable antidumping or countervailing duties.

Let me restate that just to make sure that our friends understand what I am saying. I believe in letting people know where we stand and what the consequences are if they take certain actions. I think we owe them that and I think we have signaled loudly and clearly what our intentions are should we find that the requirements for this "critical circumstances" finding have been met. Having been completely candid about the consequences of a surge in lumber imports, neither the Secretary nor I will have any second thoughts about imposing antidumping or countervailing duties retroactively to the full extent of the law should that occur.

Pursuing a Solution

In closing, let me reiterate one point. I believe it is our duty under the trade remedy laws that Congress has enacted to ensure not just that we fairly investigate the allegations brought before us by petitioning U.S. industries, but also to search for solutions to the underlying problems that give rise to those complaints in the first place.

I intend to ensure that we continue to effect Congress' intent in providing redress to U.S. industry when it faces unfairly traded goods. But, I also intend to use the industry's filing of the petition as a catalyst to pursue solutions to the underlying complaints.

I believe that is consistent with our obligation under the law and with the intent of President Bush and Secretary Evans as well. Both the President and Secretary Evans spent the formative years of their careers in business where the market places a premium on identifying solutions to problems and implementing those solutions as quickly and effectively as possible.

That ought to be our goal here as well. In that effort, both the Secretary and I will need your help. You are in a unique position to ensure that we accomplish that goal, due both to your long record as an ardent advocate on behalf of open and fair competition in international markets and because of your longstanding interest in the environment.

Thank you, Senator Baucus. I look forward to your questions and to hearing the testimony of the other witnesses appearing before you today.