Secretary of Commerce Donald L. Evans
"Trade Promotion Authority"
U.S. Senate
Committee on Finance
June 21, 2001
Thank you, Mr. Chairman, and Members of the Committee, for inviting me to testify before the Senate Finance Committee on the important topic of trade promotion authority (TPA) and the significance of international trade for America and the world in general. President Bush's trade agenda will open markets overseas, promote growth at home, help sustain high paying jobs and benefit all Americans -- trade is good for everybody. I will explain why I believe this is true and why trade promotion authority is a vital component in our ability to continue to exercise U.S. leadership. We have ideas regarding important objectives to achieve through trade negotiations, and for these we need TPA. I look forward to also learning of the Committee's objectives for the international trade agenda.
I. Importance of Trade and Investment to America
President Bush and I agree that trade means considerably more than just economic growth, more higher-paying jobs, and a rising standard of living in America. Trade is ultimately about freedom. It is the freedom for America's farmers, entrepreneurs, and workers to pursue their own economic destiny free from government interference. The case for free trade remains as robust today as when Adam Smith and David Ricardo first set it out over 200 years ago. If anything, the case is stronger because changes in technology and transportation have dramatically lowered the transactional costs of trading internationally.
Smith and Ricardo pointed out how we benefit from specialization and trade. Open markets drive us toward our comparative advantage. In other words, free trade lets us focus on what we do best.
Let me begin by focusing on the importance of open markets to the United States. In purely economic terms, it is in our own best interest to pursue open markets. As we begin the 21st century, the U.S. economy is fundamentally sound, and integrated into the world economy as never before. Trade liberalization over the past 40 years has been a key factor leading to our longest post-war period of economic growth. Since 1995, total U.S. private sector productivity has increased three percent a year. U.S. industrial production was 48 percent higher in 2000 than in 1990, and more than 20 million new jobs have been created in the United States since the early 1990s.
The fact is that the United States is a trading nation. It is the world's largest exporter, representing 12.7 percent of global goods exports. In the year 2000, exports of goods and services were equivalent to 11 percent of the gross domestic product (GDP), while imports were nearly 15 percent. Both ratios have increased from about four percent of GDP 40 years ago. In durable goods manufacturing, the presence of international trade is even more pronounced: durable goods exports accounted for about 31 percent of the sector's GDP and imports 45 percent.
U.S. export trade has expanded even faster than the overall U.S. economy. The data documenting trade growth over the last three decades are remarkable, as U.S. trade with the rest of the world has soared. U.S. exports increased from $57 billion in 1970 to $1,069 billion in 2000, an increase of over 10 percent per year. U.S. imports rose from $54 billion to $1,438 billion, a rise of 11.5 percent annually. Export growth accounted for 21 percent of U.S. economic growth in the last decade and now total trade is about one -fourth as large as our GDP. Moreover, this phenomenon is not unique to the United States -- world trade growth has increased much more rapidly than world GDP growth.
In fact, we estimate that some 12 million U.S. jobs were supported by exports in 2000. One in every five manufacturing jobs is supported by exports, and one in three acres planted in the United States grows crops destined for export. Jobs supported by U.S. goods exports -- directly and indirectly -- pay wages that are 13 - 18 percent higher than the national average and high-tech industry jobs supported by exports have average hourly earnings 34 percent higher than the national average. Thus additional exports generated by market-opening initiatives have historically had a significant impact on employment levels and incomes, both at the personal level and for the Nation as a whole.
Most American workers are employed by small and medium-sized enterprises (companies with fewer than 500 workers) (SMEs). It is clear that SMEs would be among the major beneficiaries of negotiations that reduce foreign barriers to U.S. exports. The Commerce Department's Exporter Data Base reveals that, in 1998, the number of U.S. firms exporting goods stood at 205,188 -- up 82 percent from 112,854 firms in 1992, thanks mostly to SMEs which accounted for nearly 98 percent of the 1992-98 growth in the exporter population. The number of SMEs that export merchandise soared from 108,026 in 1992 to 198,101 in 1998. Keep in mind that these figures count only firms that export goods directly, and do not include suppliers whose inputs are exported in final products or services exporters. While we do not have an exact count of such "indirect exporters", companies like CaseNewHolland, Inc., and Boeing have reported that their suppliers number in the hundreds. For example, one Case IH MX Magnum tractor has nearly 200 companies in 27 states, representing about 75,000 other jobs, all providing parts for a tractor that is exported from the CaseNewHolland plant in Racine, Wisconsin.
Emerging markets -- which often have high trade barriers -- are among the fastest-growing markets for SMEs. From 1992 to 1998, SME exports to Brazil surged by 262 percent, while exports to Malaysia increased 136 percent and sales to China rose 84 percent. Many SMEs could
sharply boost exports by entering new markets that passage of TPA could help facilitate. In 1998, 63 percent of all SME exporters -- nearly two-thirds -- posted sales to only one foreign market.
Trade also enhances our competitiveness. U.S. producers have been provided with a wider choice of suppliers. Productivity, investment, and economic growth have been stimulated through greater competition and exposure to new ideas. It is important to recognize that imports have beneficial effects on the economy, as well. Imports allow business to purchase the best available inputs, enabling production to meet market demands. Also, many of our exports go abroad for further processing/assembly and come back as finished products for consumer spending or investment. Imports also stimulate domestic competition, innovation, quality enhancement and specialization so that resources are used most efficiently. Thanks to imports, the variety of goods and services available to consumers is increased. All of these factors enhance long-term economic growth and standards of living.
U.S. consumers have had more choices at lower prices in their purchasing decisions. Trade liberalization through the Uruguay Round and the North American Free Trade Agreement (NAFTA) has resulted in higher incomes and lower prices -- benefits amounting to $1200 to $2000 for the average American family of four. It follows that development strategies in underdeveloped countries work better when their economies are more open.
It is worth noting an Organization for Economic Cooperation and Development (OECD) finding that over the last decade countries that have been more open to trade and investment have achieved double the annual average growth rates of others. A growing economy provides the resources for environmental protection, higher living standards, and the means to alleviate poverty at home and overseas.
These benefits are not unrelated to keeping one's market open to investment. The OECD also has found that countries with open trade and investment policies attract more foreign direct investment (FDI). Foreign direct investment contributes to innovation, research and development activity, skills enhancement, and higher productivity and wages, and also spurs competition. The OECD also reports that each dollar of outward FDI was associated with $2 of additional exports. Other studies report that productivity in large U.S. plants belonging to multinational enterprises (MNE) is 11 percent higher than similar non-MNE plants and use considerably more advanced manufacturing technologies. Workers in firms with direct investments from abroad were paid more too.
U.S. investment abroad helps stimulate U.S. exports and jobs in the export sector. In fact, 55% of world merchandise exports stems from foreign direct investment. U.S. multinational enterprises account for 64% of U.S. exports and 39% of U.S. imports. U.S. affiliates of foreign multinationals account for 20% of U.S. exports and 30% of U.S. imports. It is a myth that U.S. investment is directed at low wage countries or pollution havens. Some 85% of global investment outflows originate in, and 65% of inflows are directed at, other high-wage OECD countries.
President Bush calls free trade a moral imperative. As we trade with others around the world, our partners get a taste of the freedom we enjoy here.
NAFTA provides the strongest example of the sort of change that open markets encourage. NAFTA has clearly transformed our relationship with Mexico. Mexico is now our second largest trading partner -- second only to Canada, our other NAFTA partner. The expansion of trade with Mexico brought jobs and prosperity to both our nations. It created a new relationship with our southern neighbor -- one of partnership based on mutual respect. It created hope of a brighter economic future and trust in the relationship between human freedom and economic progress. At the recent Quebec Summit, President Fox of Mexico underscored that point himself. He said, "I am convinced that the democratic exercise of power, together with the democratization of the economy and the strengthening of our rule of law, will bring us more competitive, more progressive, more just, and more humane economies."
I would argue that freedom is our most important export. The single best route to encourage the export of those habits of liberty that give men and women around the world a stake in defining their own future is the removal of government-made barriers to trade and investment. When we trade, when we press for free and open markets, when we call for a level-playing field, it is ultimately in the interest of all Americans and of our friends abroad. That is because the political freedom we cherish is also the key to our economic future and to building a better quality of life at home and abroad in the 21st Century. That means political stability, social freedoms, and economic security in a community of peace.
II. Why TPA Matters
To put it bluntly, we have, in the last six years, abdicated American leadership on trade. President Bush recently observed that, "Free trade agreements are being negotiated all over the world, and we're not party to them." There are over 130 preferential trade agreements in the world today. The United States belongs to only two.
The European Union (EU) has preferential trade or special customs agreements with 27 countries, 20 of which it completed in the last 10 years. Last year, the EU and Mexico - the second-largest market for American exports - entered into a free trade agreement. The EU is negotiating another 15 accords right now. Japan is negotiating a free trade agreement with Singapore, and is exploring free trade agreements with Mexico, Korea, and Chile. Even within our own hemisphere, Canadian goods enter Chile with a lower tariff than do American goods because we have not finished negotiations on a free trade agreement with Chile.
Believe me, free trade agreements do matter. Let me give you an example of how NAFTA has benefitted one small exporter, while agreements we are not party to have adversely affected its sales. Penda Corporation, of Portage, Wisconsin, is a manufacturer and worldwide exporter of pick-up truck bedliners. Penda has been able to increase its exports to Mexico due to the easing of local content laws in Mexico under NAFTA. Penda increased its sales to Chrysler Mexico and Nissan Mexico for original equipment bedliners, and has also increased its sales in Mexico's aftermarket. Canadian aftermarket sales and original equipment sales to GM Canada and Toyota Canada have also increased since NAFTA. However, 40% import duties on its products have prevented Penda from being able to compete in Brazil. A Brazilian bedliner manufacturer currently has a major advantage over Penda in most of South America, due to the Mercosur Agreement. Thailand also assesses 40% import duties to Penda's products, and Penda anticipates a similar problem of competing in the Association of Southeast Asian Nations (ASEAN) region if the ASEAN countries are successful in fully implementing a free trade agreement.
We need to get off the sidelines and back into the game. The President intends to press forward bilaterally, regionally, and multilaterally, to expand our trade and the economic opportunities it creates for all Americans. It is what my friend, Ambassador Zoellick, calls "competitive liberalization." We want to create a "virtuous" circle of trade liberalization by being prepared to take action where the opportunities arise with those countries that share our goal of liberalizing markets.
One key element of that strategy is the renewal of the President's trade promotion authority. It is often said that we do not need trade promotion authority until an agreement is concluded and Congress must vote on its implementation. Many people cite the fact that we began the Uruguay Round in 1986 without TPA, and Congress only provided it in 1988, as a reason to delay action now. While that is true, a large part of those two years was spent preparing for the negotiations. Today's reality is that negotiations in the World Trade Organization (WTO) on services and agriculture began in 2000 and have reached the point of proposals being on the table. We need TPA to help ensure that these negotiations continue to move along swiftly.
The agreement on WTO accession reached with China by Ambassador Zoellick in Shanghai recently has helped provide new impetus to international efforts to launch a new round of WTO negotiations in Doha, Qatar, in November. China itself has endorsed the launch. Some countries have few excuses left not to launch a round other than the absence of trade promotion authority in the United States, which some claim is a symbol of our lack of commitment. We should not give that excuse validity.
For the Free Trade Area of the Americas, countries in this hemisphere committed to certain negotiating benchmarks by next spring. Securing these negotiating benchmarks was a very significant accomplishment that was predicated in part on the expectation that this Administration would be able to obtain TPA in a timely manner. Some of our negotiating partners have stated publicly that future progress on this timetable depends on the President getting TPA. And without a doubt we will need it when we launch sector- and product-specific market access negotiations early next year.
Some also argue that numerous agreements have been negotiated since TPA expired in 1994, so there is no need to act now. The fact is that most of those agreements involved restraints on the textiles trade. Apart from the Jordan free trade agreement, or the U.S.-Vietnam commercial agreement that will be considered by Congress under different legislative procedures, none have involved reciprocal market opening measures whereby we give access domestically and get access overseas.
These arguments also ignore 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 goals (our negotiating objectives) and how they will work together to achieve them. This open process, in which public comment is invited, allows problems to be identified and resolved during negotiations. It is that simple -- the United States needs a game plan, and TPA provides it.
Our intent is to work closely with Congress, not only for the passage of trade promotion authority, but to rebuild the political consensus necessary for our negotiators to engage with their counterparts at the negotiating table. In the President's view, Congress is an indispensable partner in this enterprise.
III. Negotiation Objectives
That explains the "what" of trade promotion authority, but it does not explain the "why." The "why" is that our inaction hurts American businesses, workers, and farmers, as they find themselves shut out of the many preferential trade and investment agreements negotiated by our trading partners. When the President laid out his international trade legislative agenda on May 11, he identified the specific trade negotiating objectives he intends to pursue in order to advance America's interests. I would summarize those objectives as follows.
First, the President intends to eliminate tariffs and other barriers that impede U.S. exports of goods, services, investment and ideas. We seek to ensure, through bilateral, regional, and multilateral negotiations, that other countries' markets are as free and open as our own. In fact, we need to continue work to re-establish the situation that prevailed in world trade at the end of World War I, when 3 out of every 4 dollars of goods entering the United States arrived duty free. In the trade-restrictive decades thereafter, free trade declined to the point that, by the early 1970s, only about 1 out of every 3 dollars of U.S. imports arrived duty free.
Fortunately for U.S. consumers, 66% of our merchandise imports from the world last year paid no duty at all, and the average import duty paid on all imports into the United States last year was 1.6 percent. Yet, our exporters face many barriers overseas. Duties in South American markets average 14 percent or more, with tariffs on some U.S. manufactured goods of 20-30 percent or higher.
Yes, tariffs do matter. Bound duty rates on industrial goods in major Latin American markets average 35 percent. In Asia, bound tariffs range from a low of 4.6% in Singapore to a high of 59 percent in India. While many countries may not actually apply these rates to imports, they are entitled to raise rates to these levels and will argue that these are the basis for WTO negotiations. This means that the tariff rates our exporters face can suddenly jump but still be considered legal under WTO rules and that nations may claim to cut tariffs in negotiations without reducing the rates they actually apply.
The United States led the way in the Uruguay Round by proposing creative market opening initiatives to eliminate duties or harmonize tariffs in a number of sectors of major export interest to the United States. These initiatives succeeded because we did them in close consultation with the Congress and the private sector. We followed through this initiative with more market opening for the high tech sector by eliminating duties in information technology products under the Information Technology Agreement (ITA), which was a landmark agreement in a sector vital to the growth of the global economy. Further market access negotiations are essential and the President will need to draw on all the many creative ideas for trade liberalization that in order to ensure we remain competitive in markets around the globe.
Second, the President intends to bring a special focus to areas like agriculture that would have the most profound benefits for American exporters and for global well-being. What that means in practical terms is eliminating the market-distorting practices that have limited opportunities for American farmers, encouraged inefficient production around the world, and lowered world prices for efficient producers. Developing countries have been especially disadvantaged by excessive protectionism.
A few simple averages demonstrate why trade liberalization is so important for U.S. farmers, who are the world's most efficient producers of food. In the United States, the average agricultural tariff is 12 percent, whereas the average agricultural tariff for the European Union is just over 30 percent, and the average bound tariff for WTO members is 60 percent. Imagine what our farmers could do without those constraints.
Equally important, agricultural exports have a significant spill-over effect for other parts of our economy. Agribusiness extends well beyond commodities. Almost half of the world's top 50 food processing firms are headquartered in the United States. U.S. exports from our food manufacturing companies, which include meat and poultry firms, account for one-half of our agricultural exports. Approximately half of the 3.3 million Americans who work in agribusiness are employed in the processed food and beverage industries.
Third, the President intends to focus on dismantling barriers to exports of U.S. services, which make up the largest sector of the U.S. economy. Global services trade is valued at $1.4 trillion annually and accounts for 22 percent of world trade. We estimate that some $296 billion in total U.S. services exports supported 4.2 million jobs in 2000, up significantly from 1994 when $185.4 billion in services exports supported an estimated 3.4 million jobs. U.S. exports of commercial services (excluding military and government services) totaled a record $281 billion in 2000. U.S. services exports nearly doubled over the past decade. Major markets for U.S. services exports include the European Union ($93 billion), Japan ($34 billion), and Canada ($22 billion). While Mexico is currently the largest of the emerging markets for U.S. services exports ($13 billion in 1999), sixteen other emerging markets around the world each import over $1 billion in U.S. services each year.
We want to build on this success and are working with other WTO members to improve their existing services commitments and to eventually open all services sectors to competition. We are working to improve definitions of services in the negotiations, particularly for services such as energy and express delivery services that are not adequately covered. We want to ensure national treatment between domestic and foreign service suppliers, promote regulatory reform, and improve transparency to ensure fair and open regulation of service industries. We are also stressing the need to avoid restricting the development of new technologies for use in delivering services, including the Internet and electronic commerce. Work on services is already underway in Geneva, and we are hopeful that WTO members will quickly agree to a marked increase in services liberalization.
Fourth, the President is committed to keeping electronic commerce free from trade barriers. Information technology and the Internet are expanding trade in unprecedented ways. E-commerce creates enormous potential for growth and improvements in U.S. productivity. E-commerce is one of the technological changes that has reduced the transactional costs of international trade. But
e-commerce will only achieve its potential if we prevent the creation of roadblocks to progress on the global information highway.
To this end, we seek WTO member acceptance of the following principles: 1) WTO rules and principles apply to e-commerce; 2) WTO members should avoid unnecessary or burdensome regulations; and 3) the existing moratorium on customs duties applied to electronic commerce should be made permanent and binding. Additionally, we believe the WTO should continue to examine certain legal aspects of e-commerce and trade. Finally, U.S. negotiators will work to rebuff developing country efforts to cast this as a "north-south" issue, since developing countries can benefit significantly from electronic commerce.
Fifth, the President intends to preserve our ability to combat unfair trade practices. That means vigorously enforcing our trade laws, not as an end in itself, but as a means of pursuing the elimination of the unfair trade practices that limit economic opportunity. It also means ensuring that U.S. rights under trade agreements are secure so that our farmers, workers, businesses and consumers get the benefit of the bargain that our negotiators reach at the table.
In discussing a potential new round with our trading partners, we have made abundantly clear that we oppose any weakening of WTO trade remedy rules. The Administration has been unwavering in its position that trade remedies are a critical and integral part of the multilateral trading system -- part of the balance of rights and obligations necessary to maintain that system. The United States has the most open and transparent system in the world, and we believe it is critical that our trading partners' trade remedy laws also operate fairly.
Strong and effective enforcement of U.S. unfair trade laws, as well as section 201 safeguard measures, are essential to ensure that the benefits of further trade and investment liberalization do not come at the expense of our country's core manufacturing and industrial base. To countries who see an "antidumping problem" that must be addressed, we respond that what really must be fixed are the subsidies and other market-distorting practices that lead to unfair trade in the first place. Foreign government intervention in the marketplace has long plagued vital U.S. industries, including the steel industry.
Because of these problematic practices, the President recently announced a new steel initiative to seek greater discipline on subsidies and to reduce excess global capacity. The President is also requesting a Section 201 investigation by the International Trade Commission to address current import problems facing the steel industry.
As long as governments continue to intervene in the marketplace and distort trade, it is critical that we maintain strong and effective laws to address the resulting unfair trade practices that injure our industries and workers.
At the same time, the United States has a significant interest in ensuring that our trading partners abide by WTO rules when bringing trade remedy actions against our exporters. These types of actions have increased against U.S. exporters over the last few years. For this reason, we have engaged our trading partners in discussions on implementation of the existing WTO Antidumping and Subsidies Agreements, particularly those provisions concerning transparency, due process, and independent judicial review.
I think we also need to work to reduce or eliminate barriers in overseas markets to U.S. foreign investment. Foreign direct investment has a positive impact in promoting U.S. exports, and our investment regime is already among the most open in the world. The benefits of an open investment regime are truly win-win.
Similarly, we should be looking for ways to help our firms overseas by negotiating rules or provisions that combat the pernicious impact of corruption in international trade, and provide for procedural due process. We have made great strides in helping our firms compete on a level playing field through the implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and in establishing fair and transparent procedures in various agreements governing government procurement. We need to look to extend these accomplishments.
And, finally, let me say a word about the connection between trade, labor, and the environment. I happen to be one who believes that the most significant impact that trade can have on labor and the environment is through raising standards of living and promoting greater freedom, which lead to demands for higher labor and environmental standards.
Last month, I attended the OECD Ministerial, where the OECD embraced economic growth as crucial for sustainable development. The OECD has emphasized that the best way to achieve sustainable development is to put the efficiencies of the marketplace to the service of higher environmental quality. All of this simply underscored what recent studies have shown - there is a positive link between rising per capita income (to which trade contributes) and improved environmental performance.
For example, we believe that market access negotiations afford us the opportunity to open markets for competitive U.S. environmental goods and services, and we are also interested in pursuing the reduction and elimination of environmentally damaging and economically distorting fisheries subsidies. These too are win-win proposals. We also see the benefit of conducting environmental reviews of trade agreements and are encouraging other countries to do the same.
Furthermore, the President has outlined a series of actions that the United States could take in combination with trade negotiations to move governments around the world toward increased respect for workers' rights and for the environment in connection with international trade. At the most fundamental level, the President wants to ensure that whatever steps we take with respect to trade and labor complement and not undercut the most important driving force behind improving both labor and environmental standards: market forces -- which are the source of the benefits arising from free trade.
IV. Outreach and Information Are Key to Success
Our ability to take advantage of the opportunities I have described -- global economic growth, alleviation of poverty in the less developed economies, higher American productivity, greater potential for our small businesses, and yes, a better life for the average American -- all depend on how well we communicate the importance of what we are trying to accomplish together with trade promotion authority. Quite frankly, I think we have done a poor job so far in making that case. Even more important than getting the votes we need for passage of the legislation is developing a genuine consensus throughout the country for America to lead in shaping the world economy.
We must do a better job of explaining the tremendous benefits we enjoy in this country thanks to our presence in the world marketplace. We have decades of results confirming the universal rewards of expanding trade and commerce, yet it is still not clear to many Americans that increasing trade opportunities is in their best interests. We have to explain that future generations will enjoy a better life economically, politically,and in every other way by expanding our presence in the global marketplace.
At Commerce we are developing "export fact sheets" for each of the 50 U.S. states. Each state fact sheet outlines how the state benefits from exports - such as by illustrating the role that small- and medium-sized companies play in international trade, showing how leading industries in each state benefit from exports, and highlighting local success stories. These should be ready in July. (For some reason, my staff prepared Texas as their first example!) I hope you will find these useful.
I am dedicated to doing all I can over the coming months to achieving consensus on the benefits of trade. I am encouraged by our recent meeting with leaders in the business community, who promised to commit their time and resources to educating America on the benefits of global engagement. With Congress, I am confident we will be able to build the same coalition that brought tax relief to the American people. Chairman Baucus and Senator Grassley were instrumental in that effort. Now it is time for all of us to turn this same kind of bipartisan spirit into another tax cut for America -- one that will help raise all boats and give every American the opportunity to win. But the only way we can do this is to work together. I am here to tell you that the Administration understands that nobody wins unless we all win, and we are here as partners in this effort.
The President has put forward his trade agenda to get the ball rolling. He intends to work closely with Congress to get America off the sidelines and back into the game. If we want both to expand the economic opportunities for our children, their children and all to come, and if we want to ensure that our values continue to take root abroad, we must press ahead.
This concludes my statement. I will be happy to answer any questions you may have.