Testimony of
Grant D. Aldonas
Under Secretary of Commerce for International Trade
Before the U.S. House of Representatives
Committee on Small Business
October 24, 2001, 2:00 p.m.
Thank you, Chairman Manzullo, Ranking Member Velazquez, and Members of the Committee, for inviting me to testify before the Committee on Small Business.
Our 25 million-plus small companies are the backbone of the American economy. They create three of every four new jobs, generate over half of the nation's gross domestic product, and account for nearly 97 percent of the total number of all U.S. exporters. Trade is essential to their future and to all they employ- particularly at a time when our economy is facing difficulties.
Mr. Chairman, I appreciate your holding this hearing to focus on the importance of small business to our trade policy agenda. As President Bush stated last week: "The terrorists attacked the World Trade Center, and we will defeat them by expanding and encouraging world trade."
I look forward to hearing the Committee's views on how we should shape the U.S. negotiating agenda to meet the needs of small businesses and farmers. To start that discussion, I would like to emphasize three points. First, I welcome the opportunity to discuss the importance to our agenda for small businesses and services of granting the President Trade Promotion Authority (TPA). Second, I would like to explain the important role that the Commerce Department plays as an advocate for American small- and medium-sized enterprises (SMEs) to service exporters and, more narrowly, to the travel and tourism industry. Finally, I would like to make you aware of the benchmarking exercise we are undertaking to ensure that we provide all our companies with world-class export promotion services.
The Importance of Trade Promotion Authority to Small Business
Critics of global trade argue that trade only benefits larger multinational corporations and results in massive lay-offs. They maintain that trade erodes America's labor and environmental protections.
Fortunately, the reality is just the opposite. We need to change the perception that trade agreements only benefit the large multinational companies. In fact, small businesses hold an increasingly large stake in overseas markets thanks to trade.
Over the last decade, while the United States was negotiating and implementing the North American Free Trade Agreement (NAFTA) and the Uruguay Round, the U.S. economy achieved the highest rate of sustained economic growth seen in a generation. During this period, inflation and unemployment fell to their lowest sustained levels since the 1960's.
In 1999, global trade in services was valued at $1.4 trillion- a sector in the U.S. dominated by small- and medium-sized enterprises (SMEs). We estimate that some $296 billion in U.S. services exports supported 4.4 million jobs in 2000, up significantly from 1994 when $185.4 billion in services exports supported an estimated 3.4 million jobs.
Liberalized trade is a boon to small U.S. manufacturers, which benefit from a greater supply of inputs at lower prices, enabling them to remain competitive. The U.S. manufacturing side maintained its share of GDP-- holding steady at slightly over 17 percent between 1987 and 1999. Significantly, between 1992 and 2000, while NAFTA and the Uruguay Round were opening new markets for our exporters, the overall economy grew by 35.4 percent, but manufacturing output outpaced that growth, increasing by 54 percent. Productivity in manufacturing grew at a 5.3 percent annual rate between 1996 and 2000. By comparison, the annual growth rate between 1990 and 1995 was 3.3 percent.
Trade has benefitted American workers, in both the manufacturing and the services sectors during the last decade. The U.S. economy created more than 20 million new jobs since the early 1990s. Since 1995, total U.S. private sector productivity increased 3 percent a year and real wages are up. Exports supported some 12 million U.S. jobs this past year. On average, each U.S. production worker manufactures exports that generate revenues [$55,000] sufficient to send two children to private universities. Workers in jobs supported by these exports receive wages 13-18 percent higher than the national average.
Small companies benefitted handsomely from trade liberalization. As I noted earlier, 97 percent of U.S. merchandise exporters are small- and medium-sized companies. Exports by SMEs accounted for $168.5 billion in 1999, or 29 percent of the total dollar value of these exports. Companies with fewer than 20 employees made up over two-thirds (69 percent) of all U.S. exporting firms in 1999.
Lowering foreign trade barriers helps small business exporters more than large companies in a fundamental way. While large companies usually have the resources to access foreign markets in two ways - either by exporting or by setting up foreign subsidiaries- most SMEs have only one option, and that is to export. In practical terms, that means that the more we lower foreign trade barriers, the more SMEs benefit compared to their larger competitors.
A University of Michigan study estimates that a one-third reduction in global barriers to trade in agriculture, services, and manufacturing could boast the world economy by as much as $613 billion, the equivalent of the annual output of an economy the size of Canada. Eliminating all trade barriers could boost the global economy by $1.9 trillion, over three times the size of the Canadian economy.
Trade liberalization would help SMEs achieve greater market access in international markets. In 1999, nearly two-thirds (64%) of exporting SMEs sold only to one market, with Canada and Mexico accounting for over a third (35%) of total SME export value. TPA passage would help bring about new free trade agreements to streamline and facilitate the export process, enabling SMEs who already export to enter new foreign markets.
Another important point that often gets overlooked by critics is the important role that non-exporters, including many SMEs, play as suppliers to U.S. exporting companies. Nearly three-fourths of all jobs supported by manufactured exports are generated indirectly, as export activity triggers ripple effects in supporting sectors throughout our economy. These jobs, which most people do not associate with exports, are found in firms that furnish exporters with parts, raw materials, and services. Service companies that support exporters include those in wholesaling, transportation, banking, computer services, accounting, and insurance.
Service Sector
During the coming decade, the services sector will play an even larger role in the economy than it does today: Services sector jobs are expected to account for virtually the entire net gain in U.S. employment during this period. SMEs will play a key role in this services-driven expansion, as they include a wide variety of companies involved in banking and insurance, travel, entertainment, wholesale and retail trade, legal and other business services, information, telecommunications, healthcare, education, transportation, and energy and environmental services, as well as architecture, construction and engineering services.
Every year, the Department provides thousands of SMEs with export counseling and analysis of foreign market conditions and trade opportunities. Our specialists, including Commercial Service officers posted in 160 locations in 85 countries abroad, are able to save SMEs time and money by providing such information as foreign market research, export targeting guidance, product or service-specific trade opportunities and obstacles, statistical data, industry trends, and the status of intellectual property protection overseas. Our research is of particular benefit to smaller businesses that do not have the resources or personnel to develop market research of the quality and variety required in planning any export initiative.
ITA's Office of Services provides the one-stop-shop for policy and promotion programs. The Department's "Service Industries Trade Promotion Program" consists of trade missions, catalog shows, industry conferences and roundtables, and related activities. These programs are designed for SMEs. The Department's overseas trade missions for specific services sectors assist small companies in expanding their overseas sales. For example, our "e-learning" education and training trade mission just returned from Malaysia and Thailand, and our staff will lead a franchising trade mission to China, Hong Kong and Taiwan next year.
The Department also hosts services industry roundtables and conferences in Washington and at U.S. Export Assistance Centers around the country. Hundreds of SMEs attend these conferences to learn about trade promotion events and other valuable resources the Department has to offer. These outreach events help to keep the lines of communication open between the Department's staff and small and medium sized businesses while promoting the importance of the services sector and individual service industries to global economic development and prosperity.
The Commerce Department also provides more tailored guidance on overseas market development to U.S. companies, multiplier groups, state and local governments and other federal agencies that provide outreach to U.S. services providers. The Department has developed a body of comprehensive, annual reports on worldwide services markets of opportunity (Service MOO reports) that are available to SMEs through U.S. Export Assistance Centers across the United States. Each country report identifies and describes the top ten services sectors representing the best commercial opportunities for U.S. companies. Additionally, industry-specific reports identify the top markets for specific industries on a world-wide basis. This information is particularly valuable to SMEs that find themselves at the stage of approaching a foreign market for the first time.
Recognizing the importance of supporting U.S. services firms, the International Trade Administration has created a team of trade specialists in U.S. Export Assistance Centers across the United States. This team's primary purpose is to educate, support, and promote the business interests of U.S. services companies. The Services Team works closely with local and regional outreach groups, such as the local Chamber of Commerce and state development agencies that promote services trade at the regional level.
In FY 2001, the Services Team had 266 one-on-one meetings with 44 U.S. service providers, facilitating 251 export transactions valued at over $75 million. Margaret McEntire, President of Candy Bouquet - an Arkansas-based franchiser of fine candy stores found all over the world - recently told us: "Other firms expanding abroad just need not be afraid, and need to use the Commerce Department. Forget traditional expensive attorneys and advisors - we pay our taxes and have the Commerce Department."
Let me give you a few more concrete examples of how ITA programs help SMEs:
Of course, the Department offers a broad range of programs and services, which I described in great detail last time I spoke before this Committee. These programs range from providing matchmaking services for SMEs seeking financing to developing
CD-ROMs to help foreign companies evaluate their need for information technology.
Trade Policy Development
On the policy side, the Department manages two Industry Sector Advisory Committees (ISACs) covering services. ISAC 13 is dedicated to service industries, while ISAC 17 is dedicated to wholesaling and retailing. The ISACs play a crucial role in the policy process, meeting regularly to receive briefings from U.S. government agencies about trade negotiations; reviewing U.S. policy proposals and proposals of other governments; recommending specific actions and providing general directions from a private sector perspective. Members of the ISACs include representatives from small and medium sized firms, as well as industry trade associations. In addition, we have an ISAC dedicated to SMEs- ISAC14.
Department Work in International Trade Negotiations for Services Exports
The Department of Commerce is representing the interests of U.S. services exporters, with a particular emphasis on small business service providers, in key bilateral and multilateral fora. These include the services negotiations in the WTO under the General Agreement on Trade in Services (GATS), the Asia Pacific Economic Cooperation (APEC) forum's Group on Services, and in services negotiating groups for the U.S.-Chile Free Trade Agreement and the U.S.-Singapore Free Trade Agreement.
GATS 2000
The WTO services negotiations in the GATS began in January 2000 and are well underway, with ten negotiating sessions to date, including the most recent negotiations held in Geneva October 1-12, 2001. The GATS negotiations will provide tangible results for SMEs, as the GATS is the first legally enforceable agreement dealing specifically with international trade and investment in services. The current negotiations seek to build upon commitments to liberalize services trade that WTO Members made during the Uruguay Round. The GATS 2000 negotiations will result in increased liberalization for U.S. services exports, specifically creating greater access to the markets of 142 WTO Members as well as nondiscriminatory treatment of U.S. SME services exports.
WTO Members finalized negotiating guidelines in March 2001, which provide a rough "blueprint" for how the services negotiations will proceed. In addition, Members have tabled over 70 negotiating proposals in Geneva outlining trade barriers and negotiating objectives in each major services sector, with the one exception of healthcare services. Substantive discussions of these negotiating proposals have occurred in the July and October 2001 negotiations and will continue in December 2001 - hopefully after the launch of a successful new trade round at the WTO Ministerial Meeting in Doha, Qatar.
A large focus of the GATS 2000 discussions has been on the importance of trade liberalization for services SMEs, in both developed and developing country Members.
The United States has submitted 15 negotiating proposals, and each proposal highlights the added benefits of trade liberalization to services SME's exporters. The 15 U.S. proposals include 12 sectoral proposals: accountancy; advertising; audiovisual; distribution; education and training; energy; environmental; express delivery; financial; legal; telecommunications; and tourism services; movement of people; transparency in domestic regulations; and safeguards.
In addition, the issue of enhancing transparency in the development and implementation of domestic regulations has been a central issue in the GATS 2000 negotiations. In some countries, domestic regulations are the most significant trade barrier to services trade, and making regulatory procedures more transparent and less discriminatory will translate into more business sales in foreign markets for U.S. services SMEs.
The GATS Agreement and Members' schedules establish specific commitments to provide market access and national treatment for all services sectors across four "modes" of supply - means of delivering a service, including cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
The service sectors negotiated during the Uruguay Round cover important areas for small services providers:
In GATS 2000, Members are focusing on new services sectors or those sectors that were not adequately liberalized during the Uruguay Round, including energy services, express delivery services, education/training services and others - all important services exports for U.S. SMEs.
FTAs with Chile and Singapore
The Department of Commerce is also participating in negotiations of bilateral Free Trade Agreements (FTAs) with two countries: Chile and Singapore. Texts of the services chapter of these agreements are often based on the GATS and the NAFTA texts. The agreements are expected to help liberalize trade between the United States and these countries, and may also have a beneficial influence on other international negotiations. More negotiations of this type are likely.
Asia Pacific Economic Cooperation forum
The Committee on Trade and Investment (CTI) of the Asia Pacific Economic Cooperation (APEC) forum coordinates APEC's work on the liberalization and facilitation of trade and investment. It works to reduce impediments to business activity in 15 specific areas, including services, as outlined in the Osaka Action Agenda (OAA). The CTI established the Group on Services (GOS) in 1997, and the GOS has since held 16 meetings. The work of the GOS includes information gathering and analysis, with a major focus being experience sharing and transparency. In addition to being very helpful for APEC member economies in their earlier stages of development, the services related reports and analysis that the GOS produces are very useful resources for our SMEs.
Travel and Tourism Sector
Let me now turn to the travel and tourism industry- an industry dominated by SMEs, as they comprise 95% of all travel and tourism companies.
Restoring consumer confidence in travel is key to help with the recovery for the travel and tourism industry as well as the overall economy. As an immediate response to understanding the magnitude of the impact on the travel and tourism industry, and with the support of key trade associations, Secretary Evans met with 15 CEOs from the travel and tourism industry on September 25.
The discussion allowed Secretary Evans to learn first hand from each participant the impact of the terrorist attacks on their individual industry sectors as well as hear perspective to our agenda for small businesses and services on how the U.S. Government could help revitalize this vital sector of our economy. The hotel and resort, car rental, amusement, travel agent, rail, bus, tour operator and airline businesses were represented.
In addition, on September 27, Secretary Evans conducted a conference call with six key representatives from the restaurant industry, during which participants conveyed their business concerns and perspectives on appropriate responses from the government.
As a result of these discussions, Secretary Evans concluded that restoring confidence in leisure and business travel can be accomplished through stronger government coordination and new partnerships with the private sector.
As a first step, Secretary Evans is reconvening regular, senior-level meetings of the Tourism Policy Council (TPC). Actually, Secretary Evans will host and chair the TPC's initial meeting on Monday. The meeting will include 13 agencies ranging from Department of State, Department of Transportation, Immigration and Naturalization Services to the Federal Aviation Administration and the new Homeland Security Office. The Secretary also has extended invitations to the Co-Chairs of the Senate and Congressional tourism caucuses.
The TPC's primary function is to serve as the forum to coordinate federal policies and regulations affecting travel and tourism. Now, one of the first issues the TPC is focusing on are the development of ways to restore confidence and to minimize inconvenience caused by stepped-up security measures and renew a desire to travel. The TPC provides the appropriate framework for addressing short-term recovery support and preparedness. Over the medium to long-term, the TPC also provides a continuing forum for coordinating U.S. Government efforts on behalf of travel and tourism.
The Secretary is also considering instituting ad hoc meetings between government and private sector representatives to coordinate implementation of an effective public relations strategy to help restore confidence in travel and tourism. The meetings would also allow the government and the private sector to share and disseminate data on travel and tourism to monitor the success of various recovery efforts.
Trade Promotion Authority
That said, a key element to the economic recovery of this great country is missing. That is the renewal of the Trade Promotion Authority.
It is often stated that we do not need Trade Promotion Authority until an agreement is concluded and Congress has to vote on its implementation. What that argument ignores is the fundamental role that Congress was intended to play in setting our trade policies under the Constitution.
In fact, what Trade Promotion Authority really provides is a vehicle to ensure that the Congress and the President have agreed on our objectives and on how they will work together to achieve them. President Bush recently observed that, "Free trade agreements are being negotiated all over the world, and we're not party to them." There are more than 130 preferential trade agreements in the world today. The United States belongs to only two. The President's point is that we have to get off the sidelines and back into the game, and Trade Promotion Authority is essential to that effort.
That explains the "what" of Trade Promotion Authority, but it does not explain the "why." The "why" is that our inaction hurts American small businesses and the workers they employ as they find their goods and services shut out of markets by the many preferential trade and investment agreements negotiated by our trading partners. When the President laid out his international trade legislative agenda in May, he identified the specific trade negotiating objectives he intends to pursue in order to advance America's interests.
We must make the needs of small business a priority as we draft our negotiating objectives. While small businesses benefit significantly from the lowering of tariff barriers and other restraints, they also have the strongest interest in the elimination of the red tape that often hinders our exports. That's why small manufacturers are interested in achieving additional progress on the harmonization of standards and burdensome customs procedures. We and most other WTO members seek negotiations in trade facilitation - which helps to resolve customs procedures and related transparency issues - to benefit small business.
The Industry Sector Advisory Committee on Small and Minority Business for Trade Policy Matters (ISAC-14) provides us with advice on small business priorities on international trade agreements and for our workings within multilateral fora such as the OECD and APEC SME Working Parties. ISAC-14 is part of the Industry Consultations Program (ICP) that gives U.S. companies a voice in the trade policy making process, and includes many SME representatives. For example, ISAC-14 members last summer met with the OECD Working Party on SMEs about mutual SME concerns, including the need for the OECD to focus on dispute resolution mechanisms suitable for SMEs. Also, in 1999, the ISAC played an important role in providing advice to Seattle WTO negotiators and securing SME-specific language in WTO documents.
Our SME private-sector trade advisors have expressed their strong support for TPA and believe that its passage will benefit small business interests, and we will continue to consult with them as we draft negotiating objectives. All of this points to why we need to pass TPA and get back in the game of opening new markets for our small businesses.
The Trade Promotion Coordinating Committee- Benchmarking Exercise
We are acutely aware of the fact that negotiating new agreements will only take us so far. We need to "fill in" behind the negotiations to ensure that we do not open markets only for third countries' companies. For our economy to fully benefit from new market openings, we need to expand the base of exporters -- and that means increasing the number of small businesses that export and the number of SMEs who indirectly benefit from exporting.
Small businesses, in particular, need to get information, expertise, support and financing to do the deals. This requires the coordinated effort of all of the federal agencies involved in export promotion.
TPCC Benchmarking Exercise
Fortunately, we have the right management tool in place - the Trade Promotion Coordinating Committee (TPCC), created by Congress in 1992, which is chaired by the Secretary of Commerce and is comprised of 19 agencies.
The TPCC works on behalf of small businesses by working to coordinate government export promotion programs so that small companies can access them more easily. The TPCC has streamlined financing for small business, which has contributed to a quadrupling of the value of exports supported by the working capital programs of the Export-Import Bank and the Small Business Administration. Recently, the TPCC organized a series of seminars in Baltimore, Los Angeles and Chicago, during which officials from the Commerce Department, the United States Trade Representative, the Small Business Administration, and the Export-Import Bank provided information to small firms about business opportunities arising out of recent trade legislation.
We have a plan for taking the TPCC back to its roots as a management tool by undertaking a benchmarking exercise that will help us better serve our small business customers. Our goal is to ensure that we offer them world-class export promotion services.
On October 2, Secretary Evans and the heads of Export-Import Bank, the Overseas Private Investment Corporation, the Small Business Administration, and Trade and Development Agency presented the Senate Banking and House International Relations Committee with an interim report on the benchmarking exercise. Over the next few months, we will assess our customers' expectations and their level of satisfaction with our export promotion programs. We also will compare key aspects of our programs to how other government agencies and the private sector accomplish similar goals, and develop recommendations in March 2002 that will lay out the steps this Administration intends to take to achieve world-class export promotion services.
It is more important than ever that our policy and promotion efforts on behalf of small businesses are coordinated and mutually reinforcing. Our goal is to provide the American people, and the small- and medium-sized exporters in particular, the most efficient, strategically-focused, well-coordinated and customer-driven programs possible.
Conclusion
Let me close by saying that, together, we have some tough work ahead of us. That is true of the work we have to do abroad in opening new markets to help SMEs achieve their export potential - while SMEs account for 97 percent of exporters, their share of U.S. merchandise exports hovers around 30 percent. This is also true of the work we have to do here at home in setting the stage for further trade liberalization by the renewal of trade promotion authority.
As the Under Secretary for International Trade, one of my top goals is to promote job creation, economic growth, sustainable development and improved living standards for all Americans. Helping SMEs export is at the core of this effort. To compete and succeed in a global arena, I believe that we must reach out to all communities and businesses to ensure that they are aware of the opportunities that are available to them.
Thank you again for inviting me to testify. I welcome ideas about how we can continue to improve the workings of the International Trade Administration to reach out to a greater cross-section of small businesses. Just as we must continually push for trade liberalization so that we do not fall behind the competition, we must keep improving our institutions; this is particularly important for services, where we are the undisputable world leader.
I look forward to your questions.