<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:61042.wais]
WTO 2000: THE NEXT ROUND
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HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS,
TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
NOVEMBER 4, 1999
__________
Serial No. 106-71
__________
Printed for the use of the Committee on Commerce
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COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications, Trade, and Consumer Protection
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL G. OXLEY, Ohio, EDWARD J. MARKEY, Massachusetts
Vice Chairman RICK BOUCHER, Virginia
CLIFF STEARNS, Florida BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California ANNA G. ESHOO, California
NATHAN DEAL, Georgia ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming BILL LUTHER, Minnesota
JAMES E. ROGAN, California RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois THOMAS C. SAWYER, Ohio
HEATHER WILSON, New Mexico GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Brickell, Mark C., Managing Director, J.P. Morgan and Co..... 34
Free, Brant W., Senior Vice President, International External
Affairs, the Chubb Corporation............................. 46
Papovich, Joseph S., Assistant U.S. Trade Representative for
Services, Investment, and Intellectual Property, Office of
the United States Trade Representative..................... 7
Regan, Timothy, Vice President for Government Affairs,
Corning Inc................................................ 39
Material submitted for the record by:
Koenig, Eric, Senior Federal Government Affairs Manager and
Senior Corporate Attorney, Microsoft Corporation, prepared
statement of............................................... 64
(iii)
WTO 2000: THE NEXT ROUND
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THURSDAY, NOVEMBER 4, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Telecommunications,
Trade, and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin (chairman) presiding.
Members present: Representatives Tauzin, Oxley, Largent,
Rogan, Shimkus, Bliley (ex officio), Markey, Eshoo, Luther,
Sawyer, and Dingell (ex officio).
Staff present: David Cavicke, majority counsel; Brian
McCullough, professional staff; Robert Simison, legislative
clerk; and Bruce Gwinn, minority professional staff.
Mr. Tauzin. The subcommittee will please come to order with
my sincere apologies for keeping you waiting.
The subcommittee will consider the important work of the
World Trade Organization in the upcoming Seattle Ministerial
Conference. The WTO exists to promote open and free trade
throughout the world. The 1997 Accord on Trade in Services,
which was entered into in the last Ministerial Conference, has
been particularly helpful to U.S. providers of financial and
other services by encouraging countries with restrictive
practices to end them.
Since the creation of WTO in 1994, American exports have
risen by over $200 billion annually. The WTO also provides a
system for settling trade disputes. The United States has filed
the most cases of any member and has a strong record of
prevailing in those cases. There are a number of things that we
would like to learn at this hearing this morning as we consider
the upcoming Conference.
First, what are the U.S. negotiating goals for Seattle?
What trade barriers will we be focusing on removing? In
particular, how do we hope to encourage the European Union and
the other areas to reduce barriers to telecommunications and
high tech services in which the U.S. is a clear world leader?
Second, what has been the follow-up of the successful 1997
round and the implementation of general trade and services?
Have countries like Malaysia which promised to eliminate
barriers to U.S. insurers, actually repealed those barriers?
What steps have been taken to encourage countries to sign the
GATS? Third, with respect to the emergence of electronic
commerce, what steps are being taken to keep the Internet tax
free and free of other restrictive barriers to worldwide
commerce? Our witness on the first panel, Mr. Joseph Papovich,
the U.S. Trade Representative is charged with developing and
implementing our trade strategy for the WTO negotiations. The
second panel of witnesses will be from J.P. Morgan, Corning,
and Chubb regarding what specific concerns these industries
have with world trade.
We look forward to their testimony. It is my pleasure to
welcome the Ranking Minority Member, Mr. Markey, for an opening
statement.
Mr. Markey. Thank you, Mr. Chairman. As a Democrat who
voted for GATT and NAFTA and who has been a member of this
subcommittee since he arrived in Congress in 1976, I do believe
that it is critical for the United States to continue to expand
its global economic presence and for us to capture as many of
the technological opportunities that have been created largely
by the policies that have been created domestically by this
committee so that our companies, including telecommunications
and computers and software down the line have the benefits of
the global marketplace.
I also believe that we have to have an integrated plan that
includes trade policy, education, a universal service, and tax
policy that prepares the next generation of Americans with the
skill sets necessary to succeed in the new economy.
And that is why I think it is imperative for us to work as
effectively as possible to ensure that foreign markets are
open. And I think that the upcoming meeting in Seattle gives us
an excellent opportunity to gauge our progress in this respect.
Without question, there are also important issues
surrounding foreign efforts to get the U.S. to soften some of
its positions and eliminate antidumping or countervailing duty
remedy laws at the Seattle meeting.
In addition, it remains unclear whether the nature and
extent to which worker concerns and labor rights issues will be
given prominence by the administration at the upcoming meeting
in Seattle.
I look forward to hearing from our witnesses on these
issues because without question, while all of these economic
opportunities are being opened up to the largest companies and
to the most well-educated within our society, it is critical as
well that we have a national strategy that articulates quite
clearly how we ensure that every worker, regardless of income
and regardless of race, is allowed to be able to participate in
the benefits of this new global economy.
I thank you, Mr. Chairman.
Mr. Tauzin. I thank my friend. The Chair is now pleased to
recognize the vice chairman, Mr. Oxley, from Ohio.
Mr. Oxley. Thank you, Mr. Chairman, for holding this
hearing and giving Members the opportunity to explore the
telecommunications and finance issues that will be debated in
Seattle at the ministerial meeting to begin at the end of this
month. I want to welcome all of our witnesses and particularly
those from Charlene Barshefsky's office for doing such a
tremendous job in preparing for this ministerial. I look
forward to seeing you in Seattle, and I know a strong
delegation from Congress will be there to support your efforts.
The United States goes into this new round with a strong
and unified position again leading the world on free trade. I
recently coordinated a letter from 19 members supporting
Ambassador Charlene Barshefsky's initiative to keep electronic
telecommunications tariff-free worldwide. Clearly the Internet
has taken the more advanced countries by storm in the last few
years, and that is happening more and more in the lesser
developed countries as well. So it is a critical moment and a
critical decision to maintain that environment. If we lose it,
we are never going to be able to get it back, and I want the
U.S. Trade Representative to know that she has rock solid
support on this point from the Congress.
Another key goal of interest to this committee is to draw
more countries into the WTO's financial services agreement.
Technological advances have expanded the breadth and depth of
this industry in ways that demand the deregulation of
international financial and credit markets. That is why 102 WTO
countries made market opening commitments in late 1997 in
Geneva encompassing $18 trillion in securities assets, $38
trillion in bank lending, and $2.5 trillion in insurance
premiums.
Hopefully, through Seattle and the new round of
negotiations, we will be able to bring in more WTO members
under that umbrella and further promote free trade in that
industry. We hope to make similar kinds of progress under the
1997 basic telecommunications agreement. We want to bring more
countries in and press them to meet their commitments to
liberalize trade. Mr. Chairman, I look forward to the largest
trade event ever to be held in the United States where we can
discuss these issues with representatives from the 133 member
countries of the WTO. I look forward to hearing the witness'
testimonies.
Mr. Tauzin. I thank gentleman. The Chair is now pleased to
recognize the ranking minority member from the full Commerce
Committee, Mr. Dingell.
Mr. Dingell. Mr. Chairman, thank you for your courtesy. I
also want to thank you for holding this hearing. Trade is one
of the areas in which public policy is hardly ever clear. Too
often one set of priorities is advocated to please a certain
group while conflicting priorities are advocated to placate a
different group with competing interests. This ``be everything
to everybody'' approach on trade may have certain short-term
tactical advantages, but it creates a long-term danger in that
the issues become confused and blurred and we lose sight of our
real trade interests and how to serve these interests. And in
this world, that is very important to this country. We must be
clear about our commitment to fair trade, not only in foreign
markets but also here in our domestic market. The U.S.
merchandise trade deficit is currently running at an annualized
rate of more than $330 billion, 35 percent higher than last
year's deficit.
When I came here, the real deficit in trade was something
like $4 billion a year. Our trade deficit in goods and services
is already $61 billion ahead of where it was last year at this
time. More and more our trade deficits are being fed by battles
that we are losing here on our home ground, not in foreign
markets. Whether it is steel, semiconductors, photographic
paper, softwood lumber, cement, or agricultural products,
American workers and American industry are increasingly being
forced to compete against foreign products that are unfairly
subsidized or dumped in the United States market, and unfair
trade practices abound.
I believe the administration understands this which is why
both the President and the Vice President have repeatedly
stated their opposition to negotiated changes to U.S.
antidumping and countervailing duty laws in the upcoming world
trade round. I hope that they will maintain this position very
strongly because if they don't, they will have significant
problems here in this Congress.
Unfortunately, our trading partners don't take the
administration or the U.S. concerns seriously. Clearly the
administration's views have either been ignored or
misunderstood by others in the WTO General Council, especially
by the chairman who recently called on those who will attend
the upcoming Seattle Ministerial meeting to adopt a declaration
proposing changes to WTO dumping and subsidy laws which would
gut U.S. antidumping and countervailing duty laws, something
which is clearly unacceptable to this country. If the WTO
leadership is not responsive to the U.S. position on changes to
the dumping and subsidy codes, how can anyone, the
administration or anyone in this Congress, really think that
anyone else takes the U.S. position seriously.
The administration must not allow there to be any doubt of
its resolve to ensure and I repeat, to ensure that a future
agreement does not require changes to U.S. fair trade laws.
More than half the Members of the House, 223 members, including
25 Democrat and Republican members of this committee, a
majority, have cosponsored H.Res. 298. This resolution calls on
the President not to participate in any trade negotiation where
changes to the dumping and subsidy codes are part of the
agenda.
It is time for both the President and the Vice President to
make it clear: One, they are opposed to the inclusion of trade
law changes in a new millennium round agreement; and two, they
would refuse to submit trade law changes for approval by the
Congress under fast track or any other expedited approval
procedures should such expedited procedures be reauthorized.
I want to make it clear that a lot of us here in the
Congress who want to support fair trade, because of the
unfairness of the situation, find ourselves incapable of doing
so. The situation which we are now confronting in this country
with regard to trade, trade rules, and things of that kind, is
converting a lot of us here and a lot of people out there from
free traders and fair traders and driving us to oppose these
kinds of agreements and even these kinds of negotiations.
I would point out that undercutting the last viable fair
trade remedies under U.S. law is far too high a price to pay to
win support for any future trade agreements, and I will not
support them under those conditions. Any changes to these vital
trade laws should be considered by the Congress under normal
legislative procedures. And I think this is a warning to all
that fast track is in trouble simply for this reason if not for
others. Without strong and effective U.S. trade laws, companies
like Corning, Intel, Motorola, and their employees would not
have enjoyed the success and fortune that they have attained;
hundreds and thousands of Americans would be living poorly; and
a lot of jobs that we now have in this country would not be
here to benefit our workers and our economy.
Had Corning not been successful years ago in its petition
to prevent the dumping of foreign television picture tubes in
our market, it may not have been able to develop and market
optical fiber cable and other telecommunications equipment
which now account for so much of its business. These and many
other American companies are viable today because they are able
to use U.S. antidumping and countervailing duty laws to force
foreign manufacturers to compete fairly right here in the U.S.
market.
If we permit U.S. trade laws to be weakened, we sacrifice
the ability of American companies to compete fairly and
successfully in the future. No agreement is worth denying U.S.
companies the ability of innovate and to reap rewards of their
innovation. The sooner the WTO leadership and WTO partners of
the United States understand this, the sooner we can begin to
focus on things that will open markets and ensure all parties
the ability to compete fairly and openly in world trade.
I would make one last observation and that is anyone who
thinks that free trade measures are going to face an easy time
here is making a prodigious mistake, and one of the reasons
that the difficulty confronts those kinds of measures is simply
the kind of statements that we have heard from the WTO
leadership and the fact that we are not permitted to insist on
fair treatment for the United States, for its people, for its
workers, and for our economy. Thank you, Mr. Chairman.
Mr. Tauzin. Thank you, Mr. Dingell.
The Chair now recognizes the gentlelady from California,
Ms. Eshoo, for an opening statement.
Ms. Eshoo. Good morning, Mr. Chairman, and thank you for
holding this hearing. I look forward to hearing the testimony
of our witnesses and getting the preliminary snapshot of the
issues that will be negotiated and discussed at the upcoming
Seattle Ministerial conference.
I have written a number of letters to Ambassador Barshefsky
regarding several issues which I believe deserve attention
during the Seattle Ministerial conference, and specifically the
trade related aspects of intellectual property, known as the
TRIPs agreement should not be extended. The TRIPs agreement
bound participating countries to provide a basic set of
protections to prevent the international theft of films, music,
software, video games and pharmaceuticals.
The deadline for implementing the basic set of protections
is January 1, 2000 which is not very far away, and all
countries have had 5 years to comply with this agreement. I am
hopeful that we will hold fast to this date.
Additionally, I believe we should oppose any further
cultural exemptions limiting the sale and import of U.S.
entertainment products. Last week, we heard an update of the
WIPO agreement; and I left the hearing with at least some hope
that the entertainment and high technology industries will come
to an agreement which will facilitate the sale of movies and
entertainment products over the Internet. If trade barriers are
imposed on the sale of these products, the agreement will only
work domestically limiting the scope of these industries reach
and more importantly, I think, will stifle the growth of e-
commerce.
So I thank you, Chairman Tauzin, for calling this hearing,
and I look forward to hearing more about the game plan for
Seattle from today's witnesses. I yield back the balance of my
time.
Mr. Tauzin. Further requests for opening statements? The
gentleman from Ohio, Mr. Sawyer, is recognized.
Mr. Sawyer. Thank you, Mr. Chairman. I have a longer
opening statement that I request permission to submit to the
record.
Mr. Tauzin. Without objection, so ordered.
Mr. Sawyer. In lieu of reading that entire statement, just
let me suggest that my appreciation to the Chair for calling
this hearing, and I thank the witnesses for being here. The
whole notion of removing trade barriers, making the WTO process
more transparent and accessible, the need to ensure the
implementation of current commitments and encourage increased
economic integration and promote environmental standards are
all very important to all of us regardless of the side of the
aisle that we sit on.
My opening statement concentrates primarily on e-commerce,
and I would associate myself with the statements of the
gentleman from Massachusetts regarding labor standards and an
early warning process for dispute resolution.
In conclusion, just let me say thank you to the
administration for its leadership and the WTO ministerial and
offer my support in all of our efforts to further liberalize
trade to the benefit of the global trading system and to the
continuing strength of America's position within it. Thank you,
Mr. Chairman.
Mr. Tauzin. I thank the gentleman. Any further opening
statements?
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
The Commerce Committee has always been committed to improving
competition in all areas of our jurisdiction. Competition lowers prices
and improves services for consumers. The Committee has taken
considerable effort to deregulate the telecommunications industry, we
are ready to enact financial modernization legislation. We continue to
move forward on fostering fair retail electricity markets. These
efforts benefit consumers.
Despite all the improvements that allow new entrants to compete in
our country, trade barriers to international commerce still remain. The
recent conference on financial services modernization raised solutions
to problems US financial companies encounter when it comes to competing
abroad. This is good, but I fear it is not enough.
As our economy continues to rely on foreign trade partners, it is
essential that a structure exists to permit a global economy that is
fair. Without providing advantage to one country over another.
In this regard, the USTR has been able to make significant
progress. Two years ago in Geneva, the WTO adopted the General
Agreement on Trade in Services for financial services. Agreements were
reached to allow our insurance and securities companies, and banks to
compete in Foreign markets that were previously closed. That is only
fair. That is the progress we need across all international trade
fronts that maintain significant hurdles to free trade.
I look forward to hearing the testimony of our witnesses today and
I am interested to learn in more detail the plans for the upcoming
Ministerial Conference in Seattle at the end of this month. I will be
on the look out for progress in promoting fair competition in the
global economy. Thank you Mr. Chairman for conducting this hearing
today.
Mr. Tauzin. The Chair will now recognize and welcome our
first witness, Mr. Joseph Papovich, Assistant U.S. Trade
Representative for Services, Investment, and Intellectual
Property. Mr. Papovich, we have heard stories that Seattle may
look like the Democratic convention in Chicago before it is
over. We will not impose the 5 minute rule on you in the
interest of making sure that we get a full statement.
STATEMENT OF JOSEPH S. PAPOVICH, ASSISTANT U.S. TRADE
REPRESENTATIVE FOR SERVICES, INVESTMENT, AND INTELLECTUAL
PROPERTY, OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE
Mr. Papovich. Thank you, Mr. Chairman. I too have had that
image flash through my mind.
I am here to discuss today specifically our objectives and
aspirations and goals for services in this new round that will
be launched in Seattle.
As the President has said, opening trade and services is
among our central goals in the round that we expect to launch
at the Ministerial Conference in Seattle. With this event now
less than a month away, I welcome this opportunity to testify
on our services trade agenda.
In few areas, Mr. Chairman, are the potential rewards of
successful trade negotiations as great as they are in services.
Our services industries range from finance and
telecommunications to distribution, health, education,
environment, environmental services, travel and tourism,
construction, law, engineering, architecture, it is really a
vast part of our economy.
We estimate that more than 86 million jobs are involved in
these firms and companies and entities. Over $5.5 trillion
worth of production, 70 percent of the American GDP, more than
one in seven in world economic activity. American service
providers are very successful exporters. The U.S. is in fact
the leading exporter of services with $246 billion in private
sector services exports last year, and we have an $80 billion
trade surplus in services.
Some of the sectors, the magnitude of some of the exports
of some of the sectors is interesting. There is $71 billion in
travel services last year; $37 billion in royalties and
licensing fees for such things as audiovisual services,
software, copyright payments, franchise fees, and other
services; $25 billion in freight and port services; $24 billion
in business professional and technical services; $14 billion in
financial services; $4 billion in construction services; $4
billion in telecommunications services exports.
This is some of the most thriving parts of our economy. But
these are also diverse industries, and our world leadership in
them rests on widely applicable principles. We are generally
open to both domestic and foreign competition here in the U.S.,
and we combine this with high standards of consumer protection
and transparent impartial regulation where many parts of our
services economy are not regulated. Our goal in services trade
policy, speaking broadly, is to open markets and foster the
same kind of competition transparency and efficiency in the
world economy that we enjoy here at home.
Over the past decade, we have built a foundation for
achieving this goal. Through the Uruguay Round of trade
negotiations which created the WTO, we completed the General
Agreement on Trade and Services which is generally called the
GATS which established a framework of multilateral rules
governing trade in services.
Then in 1997, we reached agreements on basic
telecommunications and financial services which brought us
further with commitments to market access and national
treatment in two of the highest value service fields. These
commitments are now showing impressive results.
Since the basic telecommunications agreement went into
effect 18 months ago, it has progressively eroded the ability
of dominant carriers in foreign countries to keep rates
artificially high and depress demand for telecommunications
services and electronic commerce. This has helped bring down
rates by half to levels as low as 10 to 20 cents a minute for
calls between the U.S. and countries like Japan and Mexico in
just the past 18 months. As a result of the broader market
access and increased investor stability provided by WTO
commitments, new investment in undersea fiberoptic cables may
result in an fiftyfold increase in capacity by the end of 2001
compared to mid-1999.
The financial service agreement came into effect even more
recently, at the end of 1997. It has already helped U.S.
service suppliers expand existing operations and find new
market opportunities across a wide spectrum of developed
countries and emerging markets through both investment in
foreign markets and cross-border trade. Growth potential for
competitive financial service suppliers is high, including in
helping emerging markets modernize their financial service
systems and to improving their infrastructure for trade in
goods and services.
At the same time, our regional initiatives in Europe, Latin
America, Asia, and Africa together with our negotiations with
33 economies who are acceding to the WTO helped create models
and set precedents for future openings in services in the WTO.
But these are only the first steps. While the 1990's have
seen a fundamental change for the better, services trade
remains restricted in too many areas. This significantly
inhibits American exports and has broader costs as well. A few
examples, telecommunications markets reserved for government
monopolies make service worse for consumers and business more
difficult for firms. Inefficient pollution-prone power and
transport reduce efficiency, worsen the quality of life, and
waste investment. Monopolies and distribution reduce the
efficiency of farms, fisheries, and manufacturers throughout
economies. And the recent financial crisis highlighted the need
to work to strengthen the world's financial systems and make
them more open and competitive.
Our agenda for the round, this new round will help address
these problems and open opportunities for Americans. We have
worked closely with Congress as well as with our own government
agencies like the Treasury Department and Commerce Department,
for example, with private industry, State and local government
or regulatory associations, and others to set the following
objectives for market access in this round for services:
As a general principle, we will strive to liberalizing
substantially a broad range of services sectors. This must
include broader and deeper commitments in areas like
telecommunications and financial services, and fundamental
improvements in the commitments of existing--of the commitments
of existing WTO members in such sectors as distribution,
audiovisual, construction, travel and tourism, education and
training, health, and environmental services.
We are proposing three approaches in pursuit of this
objective. This is in services now. We have three specific
proposals that we are putting on the table that we want to see
reflected in the ministerial declaration that is approved in
Seattle.
The first is for the possibility of sectorial agreements in
service sectors developed through creation of model sets of
GATS' commitments for key sectors of interest in the United
States. These model schedules or what one might call templates
would be equivalent to the zero for zero tariff elimination
that we have already achieved in certain goods sectors. These
model schedules would create significant movement toward free
trade, in particular service sectors, through removal of as
many restrictions in that sector as possible.
Second, we are proposing that we agree in the negotiation
to pursue horizontal methods of services liberalization, and
that may not mean much to some people but that means to pursue
commitments that would cut across all of the services sectors,
for improving regulatory policies across sectors requiring
countries to provide transparency and good government practices
to ensure that domestic regulations don't undermine the value
of our trading partners' commitments. This could include, for
example, across the board commitments to services
liberalization such as agreeing to common levels of ownership
across sectors. That would be foreign ownership across sectors.
And then third, the third approach which was the one used
in the Uruguay Round. The sole approach used in the Uruguay
Round is called request and offer. It is country by country,
issue by issue where we would make specific requests of other
countries to make commitments in specific sectors and then they
would bind those commitments in their GAT schedules.
All three of these areas would be used to get the deepest
and broadest commitments that we can in the most efficient way
possible given that this is just a 3 year negotiation. Our
objectives for the Seattle declaration and for the negotiation
beyond would also include disciplines to underpin market access
and national treatment commitments by ensuring that regulations
in services are transparent and fair. This is a major problem
that U.S. service providers complain about in other countries,
that regulations that they have to comply with are not
transparent in certain instances and they are not fair, they
are discriminatory in favor of local service providers.
At the same time, we need to maintain the ability of
regulators to meet legitimate objectives and that is important
on the opposite side of that as well.
Other objectives that we would seek to pursue in these
negotiations are increasing participation in the basic telecom
and financial services agreements, get more countries to sign
up. Another is to ensure that service rules anticipate the
development of new technologies which is very important in this
area.
We want to prevent discrimination against particular modes
of delivering services, including, for example, electronic
commerce or the right to establish. Separate from the services
negotiation itself but also essential to success is our work on
electronic commerce. Clearly a number of services, for example,
financial services, telemedicine, distance education, various
forms of entertainment, and news are efficiently and easily
delivered electronically.
We are therefore pursuing broad electronic commerce
objectives at the WTO beginning in Seattle with our duty-free
cyberspace proposal in which we seek continuation of the WTO's
current moratorium on the application of tariffs to electronic
transmissions. Over the longer term, we are seeking to ensure
that our trading partners avoid measures that unduly restrict
development of electronic commerce. We also seek to ensure WTO
rules that do not discriminate against new technologies or
methods of trade, to accord proper agreement of digital
products under WTO rules, and to ensure full protection of
intellectual property rights on the Internet. With this, we
must add capacity building, that is helping developing
countries strengthen their ability to use the net so that our
companies can then exploit the net in making sales in those
countries.
In addition to these things, we are developing ideas for
transforming and improving the WTO in areas directly related to
services. One example is trade facilitation. We have a separate
initiative underway that we hope to accomplish in time for the
Seattle Ministerial in an area called trade facilitation where
we are pushing for improved rules and commitments from
countries regarding timely and reliable customs procedures.
This is especially important for providers of distribution
services, express delivery services, Federal Express, United
Parcel Service, who need to move packages quickly; and to the
extent customs procedures are complicated, it is very damaging
to them. This is also important for smaller and medium-sized
companies who don't have batteries of customs agents to combat
each country's customs service officers.
Another idea that we are pursuing is upgrading the WTO
capacity-building function to insure that WTO members,
especially the least developed countries, are able to make and
comply with commitments in the services field. I have to say
some developing countries I think, particularly the least
developed, have a hard time understanding some of these areas
like services, like intellectual property which are so high
technology in orientation. We need to help them build capacity
for handling the rules that we want them to commit to.
In addition to building consensus on these substantive
goals, we are working with other WTO members to set a 3-year
timetable for the overall negotiations with benchmarks for
progress along the way that will ensure that the round yields
significant benefits rapidly. At this point, most WTO members
agree to such a schedule and to these benchmarks.
In conclusion, Mr. Chairman, the task ahead of us in
services trade is challenging but offers the potential for
immense rewards. It can create new export opportunities for
American service providers, and it can help us develop a more
stable, efficient, and environmentally sustainable work
economy. We look forward to close consultation and cooperation
with the committee as the round begins and as the negotiations
proceed. Thank you very much.
[The prepared statement of Joseph S. Papovich follows:]
Prepared Statement of Joseph S. Papovich, Assistant U.S. Trade
Representative for Services, Investment and Intellectual Property
Mr. Chairman, Congressman Markey, Members of the Subcommittee
Thank you very much for inviting me to testify on our services
trade agenda. We are rapidly approaching the WTO Ministerial Conference
in Seattle next month, and the new Round of international trade
negotiations we expect to launch at the event. And as the President
said in his address on the WTO last week, in this Round, opening trade
in services will be a central goal.
services in the u.s. economy
Let me begin with some basic observations on the services
industries, their place in our economy, and the rules we have developed
thus far at the WTO to facilitate trade in these fields.
The American services sector includes a vast array of industries:
from finance and telecommunications to distribution, health, education,
environmental, travel and tourism, construction, law, engineering,
architecture and more. These industries provide 86 million private-
sector jobs and over $5.5 trillion worth of production--more than 75%
of America's private-sector economic production, and more than one
dollar in seven of world production.
In addition to this productive capacity, services play a subtle but
essential role in our industrial economy, to which they directly
contribute about 2.1% of GDP in the form of construction, and provide
the infrastructure which allows manufacturing industry and farmers to
function.
--Efficient transport and distribution allow farmers to get their
products to market without spoilage, ensures that auto parts
reach the plant in time for efficient production, and enables
exporters to compete effectively over the Internet for retail
customers in other countries.
--Strong insurance, accounting, finance and legal industries ensure
that farmers and manufacturers have access to capital; that
contracts guarantee predictable, transparent and reliable
business decisions; and that consumers have high standards of
protection.
--Telecommunications, software and news dissemination are essential to
the functioning of all modern industries.
--And new technologies now developing, in particular but not only the
Internet and electronic commerce, promise a vast increase in
the efficiency and productivity of American service industries
in the years ahead.
In many of these fields, the U.S. is the world's leader. As a
general matter, our success rests on our openness to both domestic and
foreign competition, combined with guarantees of high standards of
consumer protection through transparent, fair and impartial regulation
where relevant. The competition this creates speeds innovation and
helps develop a productive, efficient economy.
services in american trade
American services industries are highly successful exporters. In
fact, the United States is by far the world's leading exporter of
services, with $246 billion worth of private-sector services exports
last year (the U.S. government also exported approximately $18 billion
in services) as compared with $165 billion in private sector services
imports. To cite some specific examples, this includes:
--$71.3 billion in travel services;
--$36.8 billion in royalties and licensing fees from audiovisual
services, software, copyright payments, franchise fees and
other sources;
--$25.5 billion in freight and port services;
--$24.3 billion in unaffiliated business, professional and technical
services, including among others:
--$4.1 billion in construction, architecture, engineering and
mining;
--$3.7 billion in equipment installation, maintenance and repair;
--$2.5 billion in legal services;
--$2.0 billion in computer and data processing;
--$1.2 billion in medical services;
--$0.9 billion in research and development;
--$140 million in sports and performing arts;
--$13.7 billion in financial services;
--$9.0 billion in education;
--$3.7 billion in telecommunications services exports.
Altogether, our two-way services trade makes up over 16% of the
total $1.4 trillion in world services trade. The pattern of U.S. trade
in these industries is somewhat different from our trade in goods. In
particular, the European Union and Japan take 46% ($114 billion) of our
private sector services exports, as opposed to 30% of our goods
exports.
current status of multilateral services agreements
These figures indicate how much services industries now contribute
to our economic growth, and to our export performance. Our goal in
services trade policy, speaking very broadly, is to open markets and
foster competition, transparency, and efficiency in the world economy,
as in our domestic services markets. This will facilitate American
exports of services, and also have potential to help create a more
stable, efficient and productive world economy.
1. General Agreement on Trade in Services
In contrast to goods trade policy, however, trade policy in
services is a relatively new development. In fact, as recently as 1993,
the world trading system had no rules for trade in services.
Thus, a major achievement of the Uruguay Round trade negotiations
was completion of the General Agreement on Trade in Services (GATS),
which for the first time established a framework of rules governing
services trade, as well as commitments in many individual services
industries.
Implementation of these commitments has been generally good. And we
have since made substantial additional progress, with commitments to
market access and national treatment in two of the highest-value
service fields through the Agreement on Basic Telecommunication and the
Agreement on Financial Services.
2. Basic Telecommunications Agreement
The Basic Telecommunications agreement, now in effect for a year
and a half, is already showing benefits. Through commitments on market
access, national treatment and regulatory safeguards by over 70 WTO
Members, its pro-competitive principles have encouraged billions of
dollars in international investment in new telecommunications
facilities, much of it led by U.S. firms. As a result, low-cost
telecommunications services are removing geography (and borders) as a
constraint on the delivery of a broad range of services and products.
Since this agreement went into effect, the ability of dominant
carriers in foreign countries to keep rates artificially high and
depress demand for telecommunications services and electronic commerce
has weakened significantly. This has helped to bring down rates by
half, to levels as low as 10 to 20 cents per minute, for calls between
the United States and countries such as Japan and Mexico in the past 18
months, benefitting consumers here and abroad. And as a result of the
broader market access and increased investor stability provided by WTO
commitments, new investment in undersea fiber optic cables may result
in a fifty-fold increase in capacity by the end of 2001, compared to
mid-1999. Such expansion has created competition for investment to
develop regional data and electronic commerce hubs, encouraging many
WTO members--e.g. Hong Kong, Korea, Japan, India, Singapore and
Jamaica--unilaterally to improve their market access commitments.
At the same time, U.S. exports of telecommunications services and
equipment have increased significantly following the entry into force
of the WTO basic telecommunications services agreement in February
1998, (as well as the Information Technology Agreement, which is on
course to eliminate import duties on virtually all equipment related to
the Internet.)
These results are tribute to the quality of the agreement, and also
to our active enforcement program mandated under Section 1377 of the
1988 Trade Act, for telecommunications trade agreements. For example,
thanks to Section 1377 actions:
--Canada last year eliminated discriminatory rules that prevented use
of U.S.-based networks for routing of Canadian domestic and
international long distance calls;
--Japan agreed to lower substantially its interconnection rates and
took a variety of steps to deregulate its telecommunications
services market under our bilateral deregulation initiative,
now in its third year. We are now strongly urging Japan to
build on these actions through implementation of a
telecommunications ``Big Bang.''
--European industry compromised with U.S. firms in developing standards
for third generation mobile telecommunications systems, and we
are actively pushing for steps by EU Member State regulators to
assure fair licensing rules by the end of this year, to allow
American technology unfettered access in Europe;
--Taiwan agreed last year to lower interconnection rates for mobile
telecommunications services firms by approximately 40% over
three years; and
--Mexico and Germany currently are under out-of-cycle Section 1377
monitoring as we await regulatory decisions that will implicate
their WTO commitments and which will be important to U.S. firms
operating in those markets.
3. Financial Services Agreement
Likewise, the 1997 Financial Services Agreement represents a
successful effort by the United States to open global financial
services markets to U.S. suppliers of insurance, banking, securities
and financial data services. While it came into effect more recently
than the Basic Telecommunications Agreement, the Financial Services
Agreement has already contributed to the ability of U.S. service
suppliers to expand existing operations and find new market
opportunities across a wide spectrum of developed country and emerging
markets, including Asia, Europe, Eastern Europe and Latin American.
The improvements encompass the ability to supply services through
investment in foreign markets or via cross-border trade. And as in
other WTO agreements, these benefits are ``locked in'' through recourse
to the GATS dispute settlement mechanism, if necessary. Growth
potential for competitive U.S. financial services suppliers is high,
including to help emerging markets modernize their financial services
systems and to improve their infrastructure for trade in goods and
services. The Agreement will provide an effective launching pad for
further negotiation of financial services trade issues in GATS 2000.
the work ahead
These are, however, only the first steps. While the 1990s have seen
a fundamental change for the better, services trade remains highly
restricted in many areas. This significantly inhibits American exports;
the costs to the world of closed markets in services are far greater:
--Inefficient, pollution-prone power and transport reduce efficiency,
worsen the quality of life and waste investment.
--Telecommunications markets still reserved for government monopolies
make service worse for consumers and business more difficult
for firms.
--Monopolies in distribution reduce the efficiency of farms, fisheries
and manufacturers throughout economies, and make exports much
more difficult for many American industrial and agricultural
producers as well.
--And the recent financial crisis has highlighted the need to work to
strengthen the world's financial systems, and make them more
open. Measures like those exemplified by the Financial Services
Agreement are important steps in that direction. Foreign
participation with fair competition in financial services is a
key ingredient in building a reliable and durable financial
system. This in turn builds confidence, fosters growth, and is
thus critical for stability.
preparing for the round
Our agenda for the Round will help us address these problems as we
open new opportunities for Americans. Since the WTO's last Ministerial
in 1998 reconfirmed that we would open negotiations in services this
year, in consultation with the Committee, U.S. industries, and trading
partners interested in services trade, we have been developing an
agenda that can bring significant liberalization, opening of markets,
and reforms throughout the world services economy. We have worked
closely with our colleagues in a number of other agencies and the
business community to develop these objectives. The result of this work
is as follows:
First, as we prepare for the Seattle Ministerial, our goal is to
launch a negotiation which enables us to secure maximum liberalization
in a broad array of sectors from all WTO members, through a broadening
and deepening of the services commitments of all WTO countries. In
preparation for these negotiations, we have set both objectives and a
negotiating process which will allow us to achieve the greatest
liberalization possible. This includes:
--Liberalizing substantially a broad range of service sectors: This
should include deeper commitments in finance and
telecommunications, together with fundamental improvements in
the commitments of existing WTO members on distribution,
audiovisual, construction, travel and tourism, the professions,
education and training, health, express delivery, energy and
environmental services. (Liberalization of distribution
services is also a critical aspect of liberalizing trade in
goods, helping ensure that agricultural goods and manufactured
products reach markets as rapidly as possible.) This would
include several different types of approaches, capable of
achieving substantial liberalization in many industries, as
follows:
--Sectoral agreements, developed through creation of ``model'' sets
of GATS commitments for key sectors of interest to the
United States. These model schedules, or ``templates,''
would be equivalent to the zero-for-zero tariff elimination
we have already done for goods. The model schedules would,
in essence, create significant movement toward free trade
in a services sector through removal of as many
restrictions in that sector as possible.
--Examining cross-sectoral or ``horizontal'' methods of service
liberalization, by improving regulatory policies across
industries, for example, for all countries to provide
transparency and good-government practices to ensure that
domestic regulations do not undermine the value of our
trading partners' commitments. This could also include
across-the-board commitments to services liberalization,
such as agreeing to common levels of ownership across
sectors.
--And ``request-offer'' talks like those under the Uruguay Round,
in which we selected top priorities for liberalization of
services in the economies of particular trading partners.
--Ensuring that services rules anticipate the development of new
technologies. Examples of the potential of new
telecommunications, information technologies and the Internet
to support trade in services are obvious in almost every field,
from colleges which can teach, hold examinations and grant
degrees via the Internet; to home entertainment products
delivered by satellite; long-distance environmental monitoring
of air and water quality; and advanced health care delivered
directly to the home or to rural clinics via telemedicine.
Service providers in years to come will find many new
opportunities to use new technologies to deliver their products
overseas, and should not encounter discrimination based on
choice of technology.
--Preventing discrimination against particular modes of delivering
services, such as electronic commerce or rights of
establishment.
--Increasing participation in the Basic Telecommunications and
Financial Services Agreements: Expanding country participation
is a goal in several of our regional initiatives, notably in
Africa, and will also be a focus in the Round.
related issues
1. Electronic Commerce
Separate from the services negotiations, but essential to success,
are the U.S. goals in electronic commerce. While we believe broad
classification of digital products as goods or services is premature,
clearly a number of services--telemedicine, distance education, some
forms of entertainment, news--can be efficiently and easily delivered
electronically. We therefore have a broad program underway at the WTO
to help ensure unimpeded development of electronic commerce.
This begins at the Seattle Ministerial with our ``duty-free
cyberspace'' program, in which we are seeking extension of the WTO's
current moratorium on application of tariffs to electronic
transmissions. We will also embark upon a program to ensure that our
trading partners avoid measures that unduly restrict development of
electronic commerce; ensure WTO rules do not discriminate against new
technologies and methods of trade; accord proper treatment of digital
products under WTO rules; and ensure full protection of intellectual
property rights on the Net. Together with this is a capacity-building
program, to help developing countries develop their ability to use the
Internet, speeding their development and technological progress.
2. WTO Reform: Trade Facilitation and Capacity-Building
At the same time, we are developing ideas for reforming and
improving the WTO in some of the areas directly related to services.
One example is trade facilitation, with a special focus on ensuring
timely and reliable customs procedures. This is especially important in
the context of distribution services--an efficient distribution network
can lose much of its value if long delays let food spoil in transit or
delay shipment of auto parts and semiconductors for factories.
A second is upgrading the WTO's capacity-building function, to
ensure that members are able to make and comply with commitments in the
services field. Services trade is a new and highly complicated issue
for many WTO members, especially the least developed countries. The
National Statements circulated by many of these nations at the WTO's
1998 Ministerial Conference in Geneva, for example, showed a widely
shared concern that domestic regulatory agencies are having trouble
meeting even existing WTO commitments. As we seek greater participation
in the Basic Telecommunications and Financial Services agreements, and
liberalization of further sectors, it is essential to address these
concerns to ensure that services commitments will have meaning in the
real world.
preparing for a successful negotiation
In addition to building consensus on these substantive goals, we
are working with other WTO members to create a timetable and process
that will ensure that the Round yields significant benefits rapidly.
1. Timetable
One element of this is agreement on a limited time-table for
completing the negotiations. At this point, most WTO members agree with
us that a three-year schedule would be appropriate.
In practical terms, the schedule would be as follows. At Seattle,
the Ministers will take decisions launching the Round, agreeing on the
subject matter, and setting out in specific terms the objectives of the
three-year negotiations. Negotiations should begin in earnest at the
beginning of 2000, with, as some WTO members suggest, the formal
tabling of initial negotiating proposals by the middle of the year.
Further benchmarks to ensure progress would follow, such as a possible
``mid-term'' Ministerial review at the 18-month point.
2. Manageable Agenda
Second, we are working toward consensus on an agenda which meets
the top priorities of all participants in the Round, and is broad
enough to create political consensus among WTO members; but is also
focused and manageable enough to complete within three years. Of
particular importance for the services negotiations, many developing
countries have raised concerns about a negotiating agenda so large that
it would make implementation difficult. We have stressed this point in
a number of international discussions, most recently in Switzerland
last week.
3. Consultations at Home
In addition, we are consulting intensively at home on specific
objectives for each sector with Congress, industry, labor, and civil
society groups, as well as Governors, state regulatory officials, and
state legislators. This will continue, of course, beyond the
Ministerial through conclusion of the Round.
Consultations with state officials are especially important if the
Round is to succeed. In America as in some other countries, service
standards and regulations are often established by state governments or
private professional associations rather than national governments; and
there are often good reasons for this. Trade policy must respect and
work with the relevant bodies.
4. Toward Seattle
Finally, we are working toward consensus on several specific
achievements, to be completed by the Ministerial, that will yield
concrete benefits, build momentum for the services negotiations and
help us achieve our broader goals. These include progress toward an
agreement on transparency in government procurement, which is a major
purchaser of services worldwide; and as I noted earlier, in electronic
commerce, work toward extension of the moratorium on tariffs applied to
electronic transmissions.
role of accessions and regional initiatives
Last, let me note our services initiatives in two other areas--the
33 separate negotiations on accessions to the WTO now underway, and the
regional initiatives we have begun in Europe, Africa, Asia, the Middle
East and the Western Hemisphere. These offer their own immediate
benefits for American service providers; but also help us set
precedents and develop models for the goals we have set in the Round.
1. WTO Accessions
With respect to the WTO accessions, in the past year we have
completed the accessions of Latvia and Kyrgyzstan. Estonia has also
completed its accession, and will enter the WTO on November 13th. We
have completed bilateral negotiations with Albania, Croatia, Georgia
and Taiwan; and made significant progress on a number of other
accessions, including those of Armenia, Jordan, Lithuania and Oman.
Significant progress has also been achieved with respect to China's
accession. In each of these accessions we have sought commitments in
broader ranges of service sectors, and agreement to participate in the
Financial Services and Basic Telecommunications agreements. These set a
foundation from which we can work in the WTO Round.
2. Regional Initiatives
Regional initiatives also play an important role, again for their
direct and intrinsic benefits but also as models for what we might hope
to achieve worldwide.
An especially important case is the work toward establishment of a
Free Trade Area of the Americas (FTAA). These talks include a
Negotiating Group entirely devoted to trade in services, which like the
other FTAA Groups has completed an ``annotated outline'' of an FTAA
services chapter this fall. This will help us build a Western
Hemisphere consensus on shared goals as the Round approaches. Likewise,
the FTAA has established a special Committee to advise us on ways to
develop electronic commerce in the hemisphere.
The Transatlantic Economic Partnership (TEP) with the European
Union--our largest overseas services market, taking over a third of our
private sector services exports last year--offers another forum. Here,
we aim to make it easier for U.S. professionals and firms to operate in
Europe, safeguard U.S. interests as the EU expands, and set an example
of bilateral liberalization which the world can follow in the Round.
Under the ``TEP Action Plan,'' we are working with the EU toward an
agreement setting a framework for negotiating Mutual Recognition
Agreements--that is, agreeing to recognize accreditation or licensing
granted under one another's regulatory standards--in services fields,
as appropriate.
Our bilateral work in Japan has similar goals. Our initiatives are
aimed at improving access for US firms and professionals to Japan's
vast market, through negotiation and enforcement of agreements covering
such sectors as insurance and telecommunications. During Prime Minister
Obuchi's visit to Washington this summer, through the Enhanced
Initiative on Deregulation and Competition Policy we agreed that Japan
will take concrete deregulatory measures in sectors including
telecommunications, financial services, energy and distribution
services, as well as broader horizontal issues such as transparency.
The President's Africa initiative offers another dimension of
experience. This encourages deeper services commitments--Ghana and
Uganda have this year agreed to join the Financial Services Agreement--
and includes a major capacity-building component to help African
nations develop regulatory, legislative and technical capabilities in
services sectors. One prominent example is USAID's Southern Africa
Regional Telecommunications Restructuring Program, which helps promote
modern telecommunications laws and regulation in six southern African
nations through technical advice, seminars for regulatory officials and
suggestions on legislation. Another is the Leland Project, which has
helped eight African countries develop Internet gateways and enter
electronic commerce. This experience will help the WTO strengthen its
own capacity-building work, and is crucial to ensuring strong
developing country support for a new Round.
conclusion
In conclusion, Mr. Chairman, the task ahead of us in services trade
is very challenging, and will offer immense rewards both in terms of
new export opportunities for American service providers, and for the
development of a more stable, efficient, and environmentally
sustainable world economy. We look forward to close consultation and
cooperation with the Committee as the Round begins, and as the
negotiations proceed.
Thank you very much.
Mr. Tauzin. Thank you, Joe.
We have a vote on the floor. Mr. Largent has already voted,
and so we will just continue the hearing. We will come back
from the voting in just a few minutes. I am going to recognize
Mr. Largent as the Chair that he might continue the hearing.
I just want to lay some things down. How many members now
in WTO?
Mr. Papovich. I think it is 134.
Mr. Tauzin. I read your statement on the new accessions
that you are working on, but obviously China is the biggest of
the companies who are still out of WTO. How close are we to
agreements with China on WTO accession?
Mr. Papovich. It is not my area of responsibility so I
cannot speak definitively. We have been frustrated in recent
months that we have not been able to get back to the table.
Mr. Tauzin. Are there any other major countries not part of
WTO that we ought to be concerned with?
Mr. Papovich. Russia, and they are also in the accession
process; but I must be frank in saying that they are very
reluctant to make the kinds of commitments that we feel
countries must make in order to become a WTO member.
Mr. Tauzin. However, there have been accessions with
Latvia. You mention volatile negotiations with Albania,
Croatia, Georgia, Taiwan, and significant progress on Armenia,
Jordan, Lithuania, and Oman, and so the process still
continues?
Mr. Papovich. Right. These countries are making
commitments. They have to buy their way in. They are making
commitments beyond what many WTO members have made.
Mr. Tauzin. Tell us about what countries are part of the
FTAA, Free Trade Area of the Americas.
Mr. Papovich. There are 34 countries with democratically
elected governments in this hemisphere, and that is everyone I
believe but Cuba, I could be wrong. And all of those countries,
we are one of them, all of us are participating together to try
to conclude a Free Trade Area of the Americas by 2005. This
week, there was a ministerial meeting in Toronto on that
subject.
Mr. Tauzin. I am going to recognize Mr. Largent as the
Chair, and he can continue questioning.
Mr. Largent [presiding]. I have several questions here, Mr.
Papovich. I don't know if I have enough to last until the rest
of the members get back, but we can have a good conversation
anyway.
The upcoming meetings that are going to occur in Seattle,
and by the way if you need to know a couple of good
restaurants, I can give you some recommendations. But some of
the improvements that USTR is attempting to make in trade, in
telecommunications and financial services, that is your area of
expertise, isn't it?
Mr. Papovich. Right. I don't know how much time I will have
to visit any of those restaurants. I would love to have the
chance, but I don't know.
First in telecommunications, one of the great achievements
of the 1997 agreement was the so-called reference paper. It
established what is called pro-competitive regulatory
principles. Basically countries--yes, in the telecom areas, so
often countries have a dominant supplier, a dominant
telecommunications company which has to make its line available
for competitors to compete against them.
This reference paper has a number of aspects to it, but one
of its most important is that countries commit that this will
happen, that the lines will be made available at competitive
rates, and that the regulatory authority that oversees this,
every country has an FCC-like entity, will be independent of
the major--if there is a major dominating telecommunications
companies.
We want to get more companies to sign on. Sixty-two signed
on as part of the 1997 agreement. As I said a little while ago,
there are 134 members of the WTO, we want to get more of those
countries to sign onto that paper. We also want to get
companies to guarantee national access and national treatment
for our telecommunications companies. We would like to make the
telecom paper in effect--one of our goals is not just to get
more countries to sign onto this reference paper, but to make
it mandatory, make it such that everybody who is a member of
the WTO must adhere to the principles of the telecommunications
reference paper. So those are the goals.
We are still developing our specific proposals, and this is
the way that it is for all sectors of the WTO. We are--for the
Seattle Ministerial, we want to have fairly broad, specifically
as possible but a fairly broad mandate so we can pursue all of
the goals that we want. Then from January until June of next
year, we would be putting on the table specific proposals
sector by sector throughout the services area. In the months--
we have already started, but we will intensify our efforts
working with Congress and private sector parties to fine-tune
the demands that we will put in writing on the table once the
negotiations begin. Those are the general things that we want
to achieve in the telecommunications area.
One other thing that is important to say in
telecommunications, 70 countries signed this important
telecommunications reference paper that I referred to. So far--
--
Mr. Largent. You said 62 earlier.
Mr. Papovich. Seventy signed the telecommunications
agreement. So far 62 have signed onto this reference paper; and
of the 70 that signed the telecommunications agreement, 5 have
not yet ratified the agreement. In many instances, that means
that they have to get legislative approval for the commitments
that they undertook throughout the telecommunications agreement
which is more than just this reference paper. There are what we
will call five laggards who we are pushing to ratify the
agreement as quickly as possible. So in addition to the goals
that we have for getting more countries to sign on, we want to
get those five remaining to get that done.
Mr. Largent. I have a question about that. Is Taiwan one of
the countries----
Mr. Papovich. No, they are not a WTO member, and their
membership is linked to China's entry. We have completed an
agreement with them, but they are not yet a WTO member.
Mr. Largent. In the agreement--it is my understanding that
a part of the agreement that was reached with Taiwan had to do
with opening their telecom market?
Mr. Papovich. Uh-huh.
Mr. Largent. And their regulators have proposed that U.S.
carriers be subject to an up-front investment and build-out
requirements. From my view, that is not consistent with the
agreement that was reached with Taiwan. And that USTR had sent
a letter regarding that. Have you had a response?
Mr. Papovich. Yes. And there are talks underway, and we are
trying to negotiate this out. It is hard to predict exactly
when those negotiations will end, but we are hopeful that in
the next couple of months they will be done and we will solve
this problem. We agree this is a problem that needs to be
corrected.
Mr. Largent. Go ahead. I didn't mean to interrupt you.
Mr. Papovich. On financial services, again our specific
goals still--our objectives still need to be finalized working
with industry. But the general goals we have are the following.
First, as I said in my testimony, my statement, 70--we also
have, in 1997, specific agreement on financial services
separate from telecommunications and separate from all of the
rest of the services agreement. Seventy signed the services
agreement. So far 60 have ratified that agreement, so our first
objective is to get the other ten to finish their process. Most
have to enact legislative measures, and in some countries their
legislative process is slower than others. So we have to get
those ten to ratify that important agreement.
Second with respect to what is next, again, we want to do a
number of things in the area of market access and national
treatment. We want to get improved commitments with respect to
what is called commercial presence. That is another word for
investment. Improved commitments from countries allowing our
financial service providers to invest in their countries,
whether it is through majority joint ventures or 100 percent
foreign-owned subsidiaries or branches. We want to get more on
that.
We also seek improved national treatment commitments and
improved commitments for cross-border financial services,
delivering financial services from here rather than having to
go there to establish, including the electronic means.
Third, we want to work with these countries to--in the area
of regulation, again regulation and financial services is
always a high--let's face it banking, insurance, securities,
there are important prudential issues when it comes to these
areas. In some instances, we still know of significant areas
where those regulations are nontransparent or not sufficiently
transparent, where they are discriminatory and otherwise
unfair; and we want to explore with countries how to fix that.
That is very important.
And I know on the next panel after me, you will have a
representative of the financial services industry. I am sure
that he will stress this. We know that we have to put more
energy into this.
Finally in financial services, we want to do some more work
on the definitions of what is covered by financial services.
For example, among other things, recently the U.S. insurance
industry has brought to us the fact that as populations age,
many countries have been establishing private pension systems.
Still public ones too but where there are private pension
systems and private entities are managing those systems, that
there should be an opportunity for U.S. pension and private
pension providers to be able to participate; and I know that
our financial services industry, particularly the insurance
folks, would like to have us do more in this next round in
giving them opportunities to deliver their services in the
pension area and in other insurance areas that didn't get much
attention the last time around.
So those are our essential goals. Again, we will have to
fine-tune them considerably in the coming months as we put our
offer on the table for the negotiations.
Mr. Largent. One of the issues that we talk about in this
subcommittee is the advent and rapid growth of electronic
commerce. From my perspective, it almost seems like electronic
commerce is pushing the WTO maybe faster that it is willing to
go or can go which is a good thing. We talk about the global
economy all of the time and that is really what the WTO serves
to serve--or to enhance. One of the concerns we have about that
is, you know, I think one of the reasons that we have seen the
growth in it is that we have basically said this is something
that we don't know a lot about and let's first adhere to the
Hippocratic oath, do no harm; and so we have stayed away from
tariffs or taxation on the Internet. What is the USTR guiding
principles in terms of protecting the Internet and looking at
the tariff structures that I think many companies are
considering imposing on electronic commerce?
Mr. Papovich. You are absolutely right, the Internet is
moving too fast and governments, by nature, are slow. It is
zipping ahead of us.
The essence of what you are saying is exactly the same view
that we have. This is an area that needs to be left free to
develop. This is an area that is also to our advantage because
the U.S. is a huge participant in electronic commerce. U.S.
companies are huge participants, but we feel strongly that it
needs to stay free. I want to say a few words about that. That
is clearly our operating--or modus operandi. That is what we
want to have happen. I am not so sure that is where other
countries are. I think they are still more into a let's
regulate everything mode than the U.S. tends to be.
To our benefit, I don't think that the means exist yet for
folks to apply taxes and duties to electronic commerce so we
have a moment in time at least when we can accomplish something
before anybody can figure out how to tax and apply tariffs to
the Internet.
Our goals for Seattle are the following, and we will be
taking these issues beyond Seattle because this is not going to
get all resolved there:
First, at the last WTO Ministerial meeting which was in May
last year, not this past May, we achieved for the first time
this moratorium on any tariffs on Internet transmissions.
Everybody agreed, whatever number of countries, 130 or
whatever, agreed to temporarily not apply any tariffs to
Internet transmissions; but that moratorium only runs through
this next Ministerial and then it ends.
Our preference would be to make it permanent. I don't know
that we can accomplish that. So we want to have our next
position which we are now articulating an indefinite extension.
Rather than an extension to the next ministerial after this
one, we want people to agree to an indefinite extension. It is
almost the same as a permanent and then with a view to making
this commitment permanent at the earliest possible time. That
is important to getting--an agreement on extending the
moratorium is very important to achieve by Seattle because
otherwise it ends.
We are also seeking commitments from WTO members in the
following areas, and I touched on this in my statement. We want
them to affirm that the existing agreements, like the GATS
agreement, are technology neutral so that the rules that
currently apply to physical trade, national treatment,
commitments not to discriminate, et cetera, automatically apply
to electronic transmission so we don't have to negotiate a new
agreement on electronic commerce, it is already fixed in place.
We also want countries to agree that they will refrain from
taking measures that will inhibit the growth of electronic
commerce. We want to get agreement that existing WTO
commitments apply to the delivery of services on the Internet.
We have a little debate with our European colleagues about
whether all electronic transmissions are services or whether
some can be goods. Most electronic transmission, like data that
is transmitted by a bank, that is clearly a service. But if a
book gets reduced to an electronic form or software gets
reduced to an electronic form and it is transmitted and sold to
someone over the Internet, is that book a service? That book is
a product.
So we think that WTO rules governing trading goods which,
frankly, are more extensive because the GATT has been around a
lot longer than the GATS, should apply to electronic
transmissions. We don't want to foreclose the fact that some
transmissions are goods and some are services.
Finally, we want WTO members to commit that whatever they
do when it comes to electronic transmissions, that countries
will behave--take the most trade liberalizing approach possible
to electronic commerce. There is nothing specific there, but
countries make a commitment to us if they come to the place
where they will regulate the Internet, our own country may
decide to apply taxes to Internet transmissions, I don't know,
but we are dealing with tariffs here. Whatever countries do
when it comes to regulating the Internet, they will do it in a
way that is as trade liberalizing as possible. Those are the
kinds of things that we want to get countries to agree to now
on electronic commerce.
Mr. Largent. I have one other question, and then, Ms.
Eshoo, if you have questions, I will yield to you.
Mr. Largent. When I came to Congress 5 years ago, one of
the questions that I got asked all the time was what was it
like being in the locker room of an NFL football game. The
answer was pretty easy, just a bunch of big hairy, sweaty,
nasty guys.
I am curious, how many Ministerial meetings like the one in
Seattle have you participated in, and how does it actually
work? When the doors close and you have how many countries, 134
countries in the WTO, how do you actually negotiate this
process?
Mr. Papovich. The negotiations are actually happening as we
speak in Geneva. One of the most important products coming out
of this meeting in Seattle will be the declaration. It will be
the rules for the negotiations that we will conduct over the
next 3 years. And I explain in my statement that we have these
three objectives for services negotiations: Sectorial,
horizontal, request/offer. We want to make sure that the
declaration incorporates those ideas into it. So we want the
declaration to say that.
We are negotiating that now. Hopefully, as much of that as
possible will be done when we get to Seattle. In the services
area, we are actually optimistic that most of it will be done
and that there will not be too much negotiating left to do.
In some other areas, they may not be able to resolve all of
the issues on the declaration before Seattle; and in that case,
there are going to have to be some around-the-clock negotiating
sessions in Seattle.
There are a lot of small group negotiating sessions. If you
put 134 individuals in one room, it is difficult to have
meaningful give and take. Fortunately, as large as we are,
everyone needs to include us.
But you have a lot of arm twisting and giving and taking
that goes on. As you probably know, we have serious offensive
interests, and we also have serious defensive interests.
Congressman Dingell spoke to some of those in his opening
statement, and we need to guard against some and get what we
really need. And in the context of that, do some giving and
taking so that all of the countries feel that they come out of
this with some--their interests addressed in some way.
Mr. Largent. Thank you. I yield to the gentlelady from
California for questions.
Ms. Eshoo. Thank you, Mr. Largent; and thank you, Mr.
Papovich for your testimony.
As I mentioned in my opening statement, I am concerned
about the pressure being placed on the United States to agree
that the WTO's rules on trade in services and not its rules on
trade in goods should govern electronic commerce. I had to
leave the room during some of your statement to vote, so I may
have missed--obviously I missed some parts of your
presentation.
Can you tell members of the subcommittee what kinds of
assurances you can give us that the WTO will classify Internet
transactions individually depending on the kind of product
involved, be it service or good or intellectual property rather
than lumping these very different transactions together? I
think maybe when I came back into the room you were just
beginning to touch on it. But if you would like to elaborate, I
think you can be very instructive to us on that issue.
Mr. Papovich. We have a disagreement with a major trading
partner across the Atlantic on that. They happen to think that
all electronic transmissions should be classified as services.
We don't agree and--but we hold very strongly to our view.
Basically it is what you just said. We are not going to concede
this point.
My guess is that by the Seattle Ministerial we will not be
able to solve this, but the importance--and probably the
important thing coming out of the ministerial is that we don't
concede the issue. And we will have to continue to work on it
during this next Round in some way so when we come out the
other end, this is clarified.
I don't know that we are hurt by having a delay. In my
consultations with our service providers who rely upon the
Internet and who are worried about this and many of them are in
the IP area, as you probably know, I think they are comfortable
with that outcome. As long as we don't concede the issue, we
are okay. But we have no intention in conceding the issue that
all Internet transmissions are just services.
Ms. Eshoo. Thank you for your good work and certainly that
of our Trade Representative, Charlene Barshefsky. She is
absolutely outstanding, and the contributions that you are
making are enormous. I salute you for the work that you are
doing. Thank you, and thank you, Mr. Chairman.
Mr. Tauzin. The Chair asks unanimous consent that Mr. Jack
Metcalf be permitted to join the panel and ask questions.
Without objection, so ordered.
Mr. Papovich, I know that you responded to the tariff free
question that was proposed to you by Mr. Largent, but I want to
expand on that just a bit. GATS, as you know, allows countries
to have border adjustable taxes, and many countries do.
Countries such as those in the European Union who have value
added taxes often rebate those taxes to the manufacturers when
their products are sold in this country.
I go to Britain today and buy a product, I fill out a form
and get the taxes back. In effect, they are importing to
America value added tax free. The American tax system is not
border adjustable. Income taxes basically become part of the
purchase price of products we sell. That is inevitably true of
services we sell over the Internet. If I am a service provider
in America and all of my employees and I are paying income
taxes and we are hiring accountants and lawyers to deal with
the IRS, those costs are part of our cost of doing business
which eventually become part of our product cost as we send
those services over the Internet or receipts.
The dean of the Harvard Economics School estimates that the
average additional cost to American products because of the
income tax code is 25 percent. That is a pretty big number.
Here is my question.
If GATS allows countries who are part of the WTO to import
telecommunications services into America value added tax free,
and American companies without a border adjustable tax are in
competition with them both here and abroad with a 25 percent
IRS average cost impact on their products, until and unless we
adopt a border adjustable tax which as you probably know I have
been advocating for a long time, aren't we at a significant
disadvantage if all we accomplish is a tariff-free cyberspace?
In short, if we simply substitute value added taxes
collected by the country of import on American services, rebate
it on their exports to America, haven't we set ourselves up to
continue to lose American jobs to folks who can import their
services into this country value added tax free and who can
sell their services in their own country in a competitive
marketplace where American services carry the extra 25 percent
income tax burden and are then value added taxed in those
countries? In short, has a value added tax replaced the tariff
as an unfair trade barrier to American competition?
Mr. Papovich. I was unprepared for this one. First, you are
asking me a question about tax policy which is not my agency's
area of responsibility. And I say anything, it risks--Treasury
Department may be unhappy with what I say.
Mr. Tauzin. That is okay.
Mr. Papovich. Your question applies equally to trading
goods or trading physical products?
Mr. Tauzin. It may be especially true in electronics
because there we enjoy a significant trade advantage.
Mr. Papovich. We say that any taxation should be
nondiscriminatory. That is neutral and consistent. I don't know
how that applies to your question because implicit in your
question is there is a discriminatory aspect to all of this.
In the OECD, there is an international forum where we are
apparently trying to reach a global consensus on this question,
and Treasury is an active participant in this process. They are
addressing international tax issues on exactly this question, I
am told by looking at this paper. I can't take the answer much
further because I simply don't know.
Mr. Tauzin. The point of my question is to alert you to the
problem and through you to alert Charlene Barshefsky to the
problem. Pat Buchanan is rallying peasants with pitch forks to
assault the fortresses of GATT and NAFTA as if they are the
objects of the problems in our trade deficits, when as I
examine the problem, the peasants with pitch forks ought to be
assaulting the fortress we call IRS.
We are literally entering an age and it is going to be
serious when it comes to Internet commerce where here in
America we are debating how do we handle taxation of commerce
when it is an Internet commerce instead of a brick and mortar
commerce. What local and State jurisdiction has the right to
levy a sales tax or a consumer tax on that transaction.
I don't know that we are paying enough attention to the
fact that GATT and NAFTA allow consumer taxes to be placed upon
American imports and consumer taxes to not be placed upon
foreign exports into this country and more and more countries
are doing that, and they are literally substituting VAT taxes
for tariffs. So while we are bragging how we are getting
everybody to lower the tariffs, they are quietly raising the
VAT taxes, and those VAT taxes become as effective a tariff as
there ever was as long as we in America don't reciprocate. As
long as we in America have income taxes that are not border
adjustable and they have VAT taxes that are border adjustable,
it seems to me that we are trading away our labor and our
manufacturing base.
In the electronic commerce area, we may be trading away our
advantages. To put it very simply, if I am an electronic
commerce retailer in America and I can't rebate the income
taxes, the American taxes, on my sales overseas, I don't get
that rebate, and my competitor overseas does get a rebate when
it sells those goods into this country, and they also
additionally tax my products when they go over there, not with
a tariff but with a value added consumer tax. It seems to me
that--duh--we are going to continue to have a trade deficit ad
infinitum, and it is going to continue to grow. And the
advantages that we have in some markets like electronics and
intellectual property sales are going to be quickly lost.
At a 25 percent disadvantage, how can we survive when in an
electronic commerce age the cost of doing business on the
Internet is exponentially going down.
I know that you don't have an answer, and I know that you
can't put yourself on a grill for someone at Treasury to roast
you, but I hope you and our Trade Representative become
increasingly sensitized to that fact. The answer is if we sign
trade agreements that allow our friends across the world to get
rid of the tariffs and substitute VAT taxes for tariffs, we
have to be smart enough in America to get rid of the income tax
code and go to some kind of a consumer, border adjustable tax.
I have suggested the retail sales tax.
We have to do something, or we have to quit signing these
trade agreements. All of the countries that are permitted to
substitute VAT for tariffs have to quit doing that, and we have
to negotiate our way out of this mess.
I am particularly sensitized to it because I have spent the
last year debating with Dick Armey around the country on tax
policy. And I am particularly keen to the fact that having
signed these treaties, we ought to be smart enough to
understand what our next step is; and we are not taking that
next step.
I want to sign fast track agreements and get China in WTO,
and I want to open up America to free trade in our own
hemisphere. But if we keep doing this and we are stupid enough
to let our trading partners substitute VAT for tariffs and we
don't have tariffs or VATs, we are going to get killed; and we
deserve to get killed. Just be sensitized to that, please and
we will have a lot more discussions about it in the future.
Mr. Papovich. And I guarantee that I will point that out to
Representative Barshefsky. So far, no one has figured out how
to apply taxes or tariffs to electronic transmissions and
services, so we have a little breathing space.
Mr. Tauzin. And you have the moratorium. But as you told
Mr. Largent, your focus is on getting tariffs eliminated, and
you have also drawn a clear line between the capacity of
countries to tax internally American products sitting on the
shelf next to their own domestic products. If that continues to
be the way that we treat this issue, we are going to get
killed. An American product carrying a 25 percent American
income tax effect sits on the shelf with a British product and
then gets taxed with the British VAT. That is the way that it
works. The British product comes to America not having the
American income tax effect on it, and there are no VAT taxes on
it when it comes to America. We don't put a national sales tax
on it, and we wonder why they have an advantage. I mean, duh.
Mr. Papovich. I hear you.
Mr. Tauzin. The Chair yields to the gentleman from Ohio,
Mr. Sawyer.
Mr. Sawyer. I am going to pass for a moment, Mr. Chairman.
Mr. Tauzin. The Chair yields to Mr. Metcalf.
Mr. Metcalf. I don't have any questions at this time.
Mr. Tauzin. Mr. Oxley is just arriving in time to be
recognized.
Mr. Oxley. Thank you, Mr. Chairman.
Mr. Papovich, you testified that we have an $80 billion
surplus in trade services. I have always been curious as to why
when the trade deficit figures always come out that it is a
merchandise trade deficit and we never include services, as if
they don't count.
Why is that? And shouldn't we take a look at the real
benefits of expanding trade and services, as you obviously
spoke to, and the real benefits for our economy, just the same
way that the merchandise and the agricultural products are
reported--wouldn't that give the average person who reads these
figures a little more realistic view of what is going on out
there in regard to international trade?
Mr. Papovich. You are right, but I want to check on that. I
am not an expert on the data that gets collected.
But I think that when they say merchandise trade, they
include services as well as food products.
Mr. Oxley. I don't think that is right. I don't think that
is correct. And I have always been curious as to why that
dichotomy existed. I understand--I know that it is not your
shop that does those statistics?
Mr. Papovich. It is the Commerce Department.
Mr. Oxley. Commerce Department. I think separating those
leaves misinformation out there regarding the trade deficit,
and the trade deficit in the past has always been a very
volatile political issue which in many ways hurts our efforts
at free trade.
We are about to enact--as a matter of fact this afternoon--
major reform of our financial services laws that will allow
cross ownership of securities firms, banks, and insurers.
Glass-Steagall will no longer be the law of the land. When we
were negotiating with Europeans, they cited Glass-Steagall as
anti-competitive U.S. law, and that took place in the last
round in Geneva. With the elimination of Glass-Steagall, can we
make progress in the financial services area?
Mr. Papovich. I am still waiting to see what the final
results of your work are, but I think so. This has often been
cited as a barrier that countries have vis-a-vis us, and so I
would hope that we can get something in return for that.
Mr. Oxley. You may have noticed an article in the
Washington Post regarding the WTO and the number of anti-WTO
types that are running around out there, and I think there are
45 anti-WTO websites and the like.
In that article there was a reference to the fact that the
anti-WTO forces had won a victory regarding the financial
services area, I don't know whether you picked that up or not,
but it stuck out like a sore thumb to me, and I am wondering
what kind of a victory that might have been, because as you
cited in your testimony, there are over a hundred countries
signed to the financial services agreement which I think is the
second agreement under the WTO after telecommunications; is
that correct?
Mr. Papovich. Under services.
Mr. Oxley. Under services, right. Do you know of anything
like that?
Mr. Papovich. The last 3 days there has been a world
services Congress in Atlanta, Georgia. So I didn't get to see
the Post for the last 3 days so I didn't see that article.
Based on what I know, those who oppose us at Seattle, based on
what I know of their objectives, I can't imagine what would be
in the--in this act.
Mr. Oxley. I will be glad to send you that article.
Mr. Papovich. I can get it.
Mr. Oxley. I would love to hear your take.
Mr. Papovich. Okay.
Mr. Oxley. Last April, the administration rejected a very
favorable deal with China on that country's WTO entry. And in
fact, at that time China was offering unprecedented access for
U.S. insurance companies, was willing to grant U.S. firms up to
51 percent ownership of Chinese telecommunications ventures. At
that time, the administration refused to take yes for an
answer, and here we are now trying to put Humpty-Dumpty back
together again.
It looks like from what I can read that we will be forced
to accept a less favorable deal in advance of the Ministerial
as it related to insurance and telecommunications. We have been
historically wide open to foreign telecommunications investment
since the FCC implemented the WTO telecom agreement, which I
strongly supported. I understand that USTR is going to accept
the Chinese prohibition of majority foreign investment in
Chinese telecommunications companies. Is that correct?
Mr. Papovich. I am not personally involved in negotiating,
and I don't know that that is the case. I read that in the
newspaper myself. I talked to my counterpart who is responsible
for China, and he said that is not so. We would need to ask our
China negotiator to talk to you about exactly what is happening
in the negotiation.
I don't know, in fact, that there are negotiations going
on. I talked to my counterpart about that, and he was a little
surprised about these articles and these assertions that we
have seen in the press about making concessions like the one
you just mentioned.
What I do know is that in the April agreement or the status
of the April negotiation, there were some significant things we
still wanted to get. And in my area, services, we still felt
that the Chinese had not done enough in banking, and securities
and the audiovisual areas. So there were improvements that we
felt that we needed to get. It has been regrettable that all of
these months have gone by, and we still don't have an
agreement.
It is also not clear to me that this is going to get done
in time for the Seattle Ministerial. The press has given the
impression that suddenly the process has started again. I don't
know that is so.
Mr. Oxley. We were briefed before Jiang Zemin's visit, the
Commerce Committee was briefed at least once, maybe twice, and
all of us, I think, left those meetings with a very solid
feeling that the deal was going to be completed during Jiang
Zemin's visit.
When that did not happen, I think there was a lot of
disappointment up here on the Hill. Frankly, we were given
information from Ms. Barshefsky personally that they felt very
comfortable with where those offers were and that they were
ready, I got the distinct impression that we would accept that
offer and that would, of course, have solved a lot of problems
and obviated the need to do this dance before Seattle.
And so we are hopeful, of course, that that can be
completed, but based on what we saw in April, all of us are not
necessarily holding our breath. I yield back the balance of my
time.
Mr. Tauzin. I thank the gentleman. The Chair recognizes the
ranking minority member from Massachusetts, Mr. Markey.
By the way, Mr. Papovich, why did your statement end in a
half sentence?
Mr. Papovich. There is a mistake, obviously.
Mr. Tauzin. I would like to know what the rest of the
statement says.
I recognize Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman. On the other hand,
many verbal presentations by witnesses before this committee
have been interrupted in a way that when reading the transcript
will always leave historians wondering what the witness would
have said when the congressman interrupted.
I understand that Ms. Eshoo has already raised questions in
the areas that I am about to pursue.
Electronic commerce in many ways renders the distinction
between goods and services obsolete or at least more confusing.
I would like your views on this issue. If I receive a book, a
physical book, from a transaction with amazon.com, would that
be treated as a good or a service from your perspective?
Mr. Papovich. The problem is that we don't know. As a
practical matter, there are no duties or other restrictions in
the WTO on electronic transactions right now, partly because
technologically know how to do it, so we need to sort that out.
Mr. Markey. What is your view?
Mr. Papovich. If you received a book in electronic form, I
would say it is a good.
Mr. Markey. It is a good?
Mr. Papovich. Uh-huh.
Mr. Markey. If I get the same book downloaded onto my
computer to read on-line or peruse as an electronic book, does
the answer change?
Mr. Papovich. I don't know the answer to your question.
This is what----
Mr. Markey. Do we have a position as a country?
Mr. Papovich. Working closely with industry, we are still
formulating a position. We talked about this before.
I said that some of our trading partners would like to
finalize this debate now, and their argument is that it is a
service. Anything that is transmitted electronically is a
service.
And because this is such a new technology and these sorts
of transmissions like books being transmitted on-line are so
new, we don't have a final view. Let me check with my
colleagues. Maybe I should make sure that I am speaking
correctly.
Mr. Markey. Okay, that is good.
Mr. Papovich. We want to keep the question open for the
time being.
Mr. Markey. The duties on goods are generally higher than
on services as a general rule. How do we handle that issue?
Mr. Papovich. There are no duties on services. It is not
something that has been dutiable in the past. There are duties
on goods, and of course they are coming down. In certain areas,
like textiles and footwear, they are still very high. But in
technology products, duties are very low. In fact, we have an
agreement that we have negotiated already, it is called the
ITA, it is the Information Technology Agreement; and we are now
negotiating ITA II to add more products which would provide
zero duties on as many physical information technology products
as possible.
So what we are trying to do is move to a point where there
is no duty on any good or service in the information technology
area.
Mr. Markey. You note in your testimony that services
comprises a very significant percentage of our trade and a very
large portion of our employment, and obviously economic growth
within the United States is largely driven by this sector over
the last decade.
This services area is a very knowledge-based employment
sector. In other words, it is not widgets, it is software
dependent, people-oriented provision of services. That means
that there are new issues being raised. In today's Washington
Post, there is an article about hackers who have cracked the
encryption protecting DVD movies and software from being
copied. My question relates to how we address trade relations
and trade deals where piracy and low cost labor make us as a
country seemingly so vulnerable in an era where increasingly we
rely economically on service-oriented, software-based
employment opportunities here at home. How are we doing?
Mr. Papovich. This is another third of my portfolio, the IP
part. We have one major effort underway, and then we are just
starting again because it is so new on the other--which is the
Internet side.
One of the biggest problems that we have in terms of piracy
is the ease with which people can make pirated versions of
these disks, whether it is a compact disk or a CD-ROM or in
Asia they have video compact disks. And I just finished a six
country trip where we are putting pressure on countries in a
coordinated way to put in place policies to prevent nefarious
individuals from setting up facilities to make millions of
copies of these disks. That is today's technology, and that is
something that we at least know what to do about.
We have started meeting with the motion picture
association, the music people, the business software alliance
about Internet piracy, and they have shown us the programs they
are beginning to put in place, the monitoring that they do.
Mr. Markey. They thought that they had reached an agreement
on a technology on DVD ROM drive that now a group of
programmers has duplicated the software equivalent to a
skeleton key and placed it on the Internet for anyone to
download. And The Washington Post staffer downloaded a Monty
Python movie in a matter of minutes using the code.
So this is--if you can just give us some larger view of
what is going on because obviously globally we are going to
have piratical activity targeting the creative work of the most
imaginative and productive people of our generation going to
the best universities of our country without full financial
return.
Mr. Papovich. In 1997, we negotiated at the World Trade
Organization a new copyright treaty establishing definitively
that Internet transmissions are covered by copyright law and
all countries have to ensure that it is a violation of
copyright law to do the types of things that you described.
Last year, Congress enacted the Digital Millennium
Copyright Act modifying our own copyright law to make it a
clear crime to do this sort of behavior and to establish
obligations on not only those who would--to make it a crime to
do the sort of thing that you just said, and to also establish
obligations on Internet service providers that if they are
notified that someone has put something up on their service
that is pirated, that they are obligated to take down that
service, remove it from their Web sites and the services that
they provide.
There is going to be a need, first, for continued vigilance
probably in the first instance by the industry associations to
be patrolling what is put up on the Internet, and then an
ability to move quickly to get action against those who put the
product out there for consumers to see and download. And the
role of government is still evolving on this. Here domestically
there is a role for our Copyright Office and our Patent and
Trademark Office and the FBI and Justice.
For us in the international trade area, the role in the
first instance is making sure that countries ratify this WIPO
treaty and make it clearly a crime in their country when this
happens.
But I think--earlier I said that it is good that
governments have not been able to figure out how to tax and
tariff Internet transmissions, it is moving faster than we are
moving, similarly the pirating activities are moving faster
than we in the private sector or government can move to stop
them.
Mr. Markey. I went with the President to China last summer
for 10 days. When we were in Beijing and we went out to the
area where all of the pirates were, they sell these movies from
the United States and they--what they had done, it is like a
giant Blockbuster store. Think of a Blockbuster ten times
bigger than the biggest store you have ever seen. The Chinese
had cleaned out all of these alleys in the week before we
arrived so when we walked down them, none of these American
movies were for sale, none of the software were for sale, and
they were policing the area because it is only two blocks from
our embassy.
Everyone in our embassy knows this because a lot of people
might clandestinely go out and buy the movies themselves. And
so there is a duality some American negotiators might have, and
I can't name any individual, but I suspect. It is a huge issue
that American negotiators are very familiar with, and the
Chinese would clearly not like an American delegation arriving
that might not have the intimate relationship with them to
observe.
Have the hackers stolen a good or a service that you know
of?
Mr. Papovich. That I know of or the example that you gave
me?
Mr. Markey. Yes. What you would use in a negotiation as an
example in terms of what hackers are doing?
Mr. Papovich. In the first instance, the bigger problem now
is what you described a few moments ago, the bazaar is full of
physical product. No. 1, that is a bigger more commercially
damaging problem; and No. 2, one that is easier to deal with.
And the way we are trying to deal with it, we are trying to
stop the production. Rather than arresting all of the
merchants, if you walk not too far from my office you can find
venders who are selling fake Rolex watches and other things.
Rather than arresting those people and stopping the production
of pirated physical product, and we work very hard with
industry on that, the hackers, the Internet side, making sure
that countries have laws in place, a lot of countries don't
have laws in place making illegal that sort of behavior. At
least we have a law then.
If our law drives these people out of the U.S. if we can
possibly be successful, we have got to make sure that people
don't flee to somewhere else because you can transmit on the
Internet pirated product from anywhere in the world.
Mr. Markey. That is my point. It goes from the virtual to
the real. You can transmit it digitally across international
boundaries, turned in a physical product, and then it is sold
in these bazaars around the world. I think that is a big
problem. Thank you, Mr. Chairman.
Mr. Tauzin. I might, as a reference for Mr. Papovich, point
out that one of the problems with negotiations between
Hollywood, the electronic manufacturers, and the internet folks
is that they have left out the broadcasters in those
negotiations, and the broadcasters are being pushed by Congress
to move their analog broadcasts to digital.
And once they do, they will have many of the same problems,
particularly when their broadcasts are loaded up on satellites
and moved around. For example, when Disney wants to show the
Lion King in digital format on a Disney channel, the future
means that they have to wait until all of the value in other
productions of that product are exhausted because they know
once they put it in digital form in a broadcast format, it is
gone. It is gone in multiples of hundreds of thousands and
perhaps millions of copies, and they have been left out of
these negotiations.
They are very interested in joining in those negotiations
because they are totally perplexed how they are going to enter
this digital world without some technology or legal
protections. I would suggest that you advise Charlene that you
might want to invite representatives of the broadcast industry
into your negotiations on the international side as well.
The Chair will recognize the gentlelady from California.
Ms. Eshoo. Thank you, Mr. Chairman.
Mr. Papovich, I want to go back to something, a question
that I asked you, and what I heard you saying to Mr. Markey
when he asked you a similar question. There is a difference
between the answers, and I think that it is important to get
some clarification here because I think it is a very important
area.
Just to refresh your memory, I asked you what further
assurance you could give both myself and the members of the
subcommittee that the WTO will classify Internet transactions
individually depending on the kind of product involved, be it a
service, a good or intellectual property rather than lumping
these very different transactions together.
Your response was that you had, we have no intention of
conceding on this issue. You were very clear which left me
feeling very, very comfortable, when I sensed in your answer to
Mr. Markey that you were back-pedaling in classifying the
sources and the goods by saying we don't know yet.
Which set of words do you want to retract?
Mr. Papovich. As he took me in his discussion, the
conversation evolved I guess I could say. We have no intention
of conceding this issue at Seattle. We are--some would like us
to concede it now that it is a service and that is all that it
is. We have said no, we will not concede that.
But when Mr. Markey pressed me to say have you decided, in
fact, that certain transmissions are in all cases a good? And
he took me through these different verifications, a book.
I had to say, we don't have a definitive knowledge
ourselves that certain types of products and certain types of
products transmitted over the Internet will, in all instances,
be a good and others will be a service.
Ms. Eshoo. You must have some sense of clarification of
defining what these things are?
Mr. Papovich. In some instances that was sort of the
problem with how he was taking me along. In some instances, in
my view, it is clear, like the transmission of the hypothetical
book, it is clearly a good. And one can't say it is always
going to be a service. No, we feel there are instances when it
is a good; but are there other instances when that transmitted
product in the way, in the final analysis it might end up being
a service, and my answer was I don't know definitively. And
that, in essence, is why it is important that we not concede
the issue now.
Ms. Eshoo. Are you going to concede the issue in the
future?
Mr. Papovich. I am not saying that we will concede it ever.
I am saying that we are keeping the issue open until we have a
clearer understanding in our own mind on this topic. I don't
have the final answer.
Ms. Eshoo. I am going to leave this area now less
comfortable with what you have said than when I first posed the
question to you because I think it is an enormously important
area for the United States to bring some definition to. If we
are going to say that we are not going to concede on something,
it is because we have clarity about what we would be conceding.
And so I suggest that you go back and bone up on this
because I think someone else could really have us for lunch.
Mr. Papovich. I will do that, but I will say that when I
sit and talk with industry people, and I will talk to them
again, that they are not certain that in all instances that the
item being transmitted is definitively a good versus some other
format definitively a service.
Ms. Eshoo. It seems to me that we had some of these debates
during the WIPO discussion in this very hearing room.
Well, I thank you for being as frank as you have been, but
again I am not leaving here very comfortable with the answer.
Thank you.
Mr. Tauzin. I thank the gentlelady. The Chair would advise
the members that you ain't seen nothing yet. When we get the
report from the Internet taxation committee in April as to how
to handle it internally in this country, there is going to be a
lot of unease in this room and around Congress. The gentleman
from Ohio.
Mr. Sawyer. Thank you, Mr. Chairman. I share the lady's
discomfort. I suspect that we are dealing in an area of
definition that we have very little experience. There are not
good analogs. It sounded like the debate in the course of this
century whether light is a wave or a particle; and the answer
is yes, it is. Is it a good or a service, and the answer is
that we are dealing in a different arena.
I represent Akron, Ohio, and we made tires for automobiles.
We have not done that for 20 years, and we are in better
economic condition than we have been for a very long time
because we have not tried to recapture what we once were and
have tried to build on things that we can do better.
We are still a command and control center for a global tire
industry and research and development center for all of--not
just tires but all of the synthetic materials that come out of
that; and when people ask me what we make in Akron, they say if
you don't make tires, what do you make?
I say that we make decisions, and we make progress.
The very topic that you are talking about is at the heart
of the potential strength of my local economy deep into the
next century if we continue to do things well that we are doing
well now.
So the ability to come to decisions about this sort of
thing is not, I am sure, to be taken lightly. I know that you
don't take it lightly. You would have given a casual answer if
it were possible, but it is not wise nor possible. I am
actually more comforted that you didn't resort to a quick
answer to this because it is going to be an abiding question
with us for some time.
Let me turn specifically to the whole business of dispute
resolution and the kind of thing as you would say in your terms
horizontally spreads across an awful lot of areas.
The whole business of trying to develop a transparent
dispute resolution mechanism, an early warning system, before
WTO panels are established, it seems to me is enormously
important. Can you talk about our current experience with that
kind of consultive process and whether there will be discussion
on how to improve it at the Ministerial?
Mr. Papovich. I can't say too much because it is not my
area of responsibility. We have been making----
Mr. Sawyer. But in your area of responsibility, if these
kind of discussions mean anything, you will rapidly be
confronting the need for that kind of system.
Mr. Papovich. We have brought more--my statistics show the
U.S. has instituted more WTO disputes on intellectual property
than any other single area. We have used the TRIPS agreement
very vigorously. There have been proposals made to try to make
the dispute settlement process more open and transparent, and
we have made our own proposals to, for example, require that
the decisions be issued promptly and these decisions are not
short. It is not just guilty or not guilty, they are long
papers, that these be published promptly to enhance
transparency.
We have argued that there should be the possibility for
third parties to file amicus briefs and that sort of thing. We
are trying to get agreement on at least some of these things
that the ministers could approve for Seattle. There will be
further negotiations required because we will not get
everything that we want, so we will continue to negotiate over
the Round. But we have hopes that at Seattle we can get
agreement, for example, on the prompter publishing of the
results just so that the public knows sooner what is being done
here.
So we are hopeful to have, A, a decision point in Seattle,
but it is not going to be the definitive decision. There is a
lot of resistance to things like amicus briefs and opening the
process for public witnessing of what is going on. There is a
lot of opposition.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Tauzin. We have got a vote on the floor. Joe, we are
going to thank you and dismiss you, and with the agreement of
the second panel, we are going to recess until 3 p.m. to give
everybody a chance to go to lunch. We will alert all of the
members to be back at 3 so we can have a full and uninterrupted
discussion.
Joe, before you leave, let me make one point again. I think
we have two ways to go as we move into the future of free
trade, particularly as we tackle the tough issues of
cyberspace. Whether you decide a book on the Internet is a good
or a service. One way to confront the tax issue is to begin
trying to negotiate agreements that will not allow people to
substitute VAT taxes for tariffs on American products as they
are shipped overseas; otherwise in this country we are going to
have to recognize that we don't have any choice but to move to
a border adjustable position ourselves.
It may help if we get some situation from all of you at the
tradeoffice whether or not it is even possible to think of new
WTO, a new GATT agreement that would prevent the substitution
of VAT taxes for tariffs. Because if that is not possible, I
think that tells us as a people, as a Congress that we have to
consider an alternative here in our own country in order to
deal with this inequity that I think is growing and could
create a lot more problems.
Let me say that the anger and the protesting and the shouts
and the noise that you are going to hear in Seattle from people
in this country who are concerned about free trade are centered
right on that notion. If free trade isn't truly fair in terms
of the way in which in a globalized free trade society some of
these new forms of taxes and new forms of discrimination are
permitted under our agreements, then workers in this country
are going to continue to oppose any further extensions of free
trade.
We are going to have the backlash that Tom Freedman talks
about in this book in this country. We cannot have the
backlashes in our own country disrupting the progress of free
trade agreements around the world. You folks need to focus on
that.
I have been told that we lose 19,000 American jobs for
every billion dollars of trade deficit. If that number is
accurate, that explains why there will be noise in Seattle and
why backlashes are developing here and around the world. I urge
you to please focus on it.
Joe, thank you for your excellent presentation. We will
dismiss you and recess the hearing until 3.
[Brief recess.]
Mr. Tauzin. The subcommittee will please come back to
order.
We have notified all of the members. Hopefully, we will get
some members in. We are going to be interrupted by votes about
every half hour.
We will get the testimony on the record. Your written
statements, as you know, are part of our record already, so you
don't need to read them to us, but we would appreciate if you
would kind of summarize for the record the highlights of your
testimony.
We will begin with Mr. Mark Brickell, Managing Director of
J.P. Morgan, which is a small mom-and-pop company.
STATEMENTS OF MARK C. BRICKELL, MANAGING DIRECTOR, J.P. MORGAN
AND CO.; TIMOTHY REGAN, VICE PRESIDENT FOR GOVERNMENT AFFAIRS,
CORNING INC.; AND BRANT W. FREE, SENIOR VICE PRESIDENT,
INTERNATIONAL EXTERNAL AFFAIRS, THE CHUBB CORPORATION
Mr. Brickell. Mr. Chairman, thank you for inviting me to
join this panel. The new round of WTO negotiations is important
to J.P. Morgan where I work. We are a global bank, and in an
average year about half of our revenues come from international
operations.
Controls on international trade and on capital flows have
far-reaching and destructive effects, and eliminating those
barriers is critically important. The United States in this
round of trade talks should encourage other nations to open
their borders to trade and should lead the way by eliminating
its own trade barriers. As part of that policy, we should
ensure that there are no barriers, no tariff barriers to e-
commerce, and we should look beyond the elimination of tariffs
and quotas and find other ways to strengthen international
trade. We should encourage the enforcement of contracts here
and abroad. These policies will be good for Americans and for
our friends overseas.
Free trade and capital flows are very close to Morgan's
heart and its history. Our bank was founded in the 1800's as
the New York affiliate of a London merchant bank. After the war
between the States, free trade permitted us to move our
headquarters from London to New York, and we continued doing
business in both places, and we still have our international
character.
In the same way that we were channeling foreign capital
into the emerging U.S. economy in the 1800's, in recent years
we have helped Americans find promising investments in other
parts of the world; and as globalization goes on and as trade
barriers are reduced, our business has grown. We believe that
these are powerful, important, and highly desirable trends.
I would like to say a couple of words about free trade and
a couple of words about policies for financial services.
Few things have survived the test of time better than the
economic case for free trade. Economists of all political
stripes have made that case. Dropping barriers to trade enables
consumers to save money and investors to earn more.
In the simplest terms, free trade makes human beings
happier because they get to do what they want to do as
government steps out of the way. The increase in WTO membership
shows that more and more countries subscribe to this view, but
there are some groups which argue to exceptions to the
principle of free trade. They worry about individuals and
businesses who will be hurt as they adjust to the new business
environment when trade barriers fall, and they are right. Those
adjustments can be painful.
But business conditions change every day, and most of the
changes have little to do with trade policy. We run low on some
resources, we invent better ways to do things, old jobs
disappear, new jobs are found. Whaling ships don't set sail
from New Bedford, Massachusetts, any more. We found cheaper
sources of energy and new jobs pumping oil from the seabed off
the Louisiana shore.
Mr. Tauzin. Good example, by the way.
Mr. Brickell. The creative destruction of those kinds of
shifts in the marketplace requires adjustments that dwarf the
disruptions that are caused by breaking down trade barriers.
Change will sweep across our workplace in America as a
result of e-commerce over the next decade. That will cause far
greater disruption than would the dropping of all U.S. trade
barriers, but no one would repeal the Internet.
The benefits of free trade are so great that in 1963, when
he wrote the book Capitalism and Freedom, Milton Friedman urged
America to move unilaterally to a free trade policy, and he
pointed to Hong Kong where there were thousands of newly
arrived Chinese immigrants as a country that had low trade
barriers and he predicted that would benefit them. It was still
true last year. The Index of Economic Freedom published by the
Wall Street Journal and Heritage Foundation gave Hong Kong the
highest rating for free trade policies. So we have a country
that shows us what happens when you follow a free trade policy.
In 1970, a few years after Friedman wrote his book, per
capita GDP in Hong Kong was $957 per person. That was about 40
percent of the per capita income back in the United Kingdom. In
the next 3 decades, the income of Hong Kong people went
rocketing up. Last year, per capita GDP there hit nearly
$25,000. The free trade policy and other sound economic
policies and low taxes drove income up so fast that citizens of
Hong Kong now have higher GDP than those in the United Kingdom
where trade is not so free.
The fact is a good reminder that free trade for the United
States is most important because it will raise the living
standard for American workers.
Turning to financial services, for most of this century
financial services have been a protected industry, and barriers
to free trade have included capital and exchange controls,
restrictions on foreign ownership and taxes on foreign
investment. We believe these obstacles to free exchange should
be reduced and eliminated. Fortunately, over the past 2 decades
these barriers have been reduced.
Perhaps the most fundamental advance in this direction is
taking place today as the financial services modernization
legislation you and Chairman Bliley and others on this
committee have worked so hard to pass is adopted. That law will
tear down barriers between American financial firms at home,
and it will also tear down barriers that have prolonged the
separation of American financial institutions from the rest of
the world. We seem to be headed back to the future toward an
era of competitiveness and opportunity similar to the time when
J.P. Morgan was formed. We are glad to see this trend. We are
glad that the WTO has included financial services on its
agenda. Formal barriers to trade and finance are becoming less
and less important as obstacles to free trade in financial
services.
Instead, it is our experience at J.P. Morgan that some of
the most significant barriers in trade and finance consist of
differences among countries in the enforceability of contracts.
Financial relationships should be governed by this principle:
When two parties agree to a contract, each party should be able
to rely on performance by the other. If a party has second
thoughts and can exit that contract without making the other
party whole, even a market that is totally open to trade and
financial services would not be attractive.
Sanctity of contract and the rule of law are cornerstones
of free trade, and it should be U.S. policy to foster those
values at home and abroad because you cannot build financial
markets without this foundation. Not all trade barriers are as
explicit as tariffs and quotas and ownership limits. U.S. trade
negotiators and international trade bodies should reinforce
sanctity of contracts and the rule of law as a key to trade and
investment.
What else should concern the U.S. negotiators? Obstacles to
commerce on the Internet would be a major setback. We believe
that there should be no tariffs on the Internet, and we commend
the U.S. Trade Representative and the administration for
pursuing this policy.
Mr. Chairman, we appreciate the fact that the
administration has taken a leading role in encouraging the
liberalization of trade policy, and we are glad that this
committee is overseeing those efforts. We hope to see further
progress as a result of the Seattle meetings and the Millennium
Round. Thank you.
[The prepared statement of Mark C. Brickell follows:]
Prepared Statement of Mark C. Brickell, J.P. Morgan & Co. Incorporated
Mr. Chairman, members of the Committee, thank you for inviting me
here today to testify about the importance of the next round of WTO
negotiations. I work for J. P. Morgan, a global financial services firm
that provides products and services for businesses, governments, and
individuals worldwide. In an average year, about half our revenues
result from international operations.
Mr. Chairman, controls on international trade and capital flows
have far-reaching and destructive effects. Reducing and eliminating
those barriers to trade is a critically important endeavor. The United
States, in the Millenium Round, should encourage other nations to open
their borders and should lead the way by eliminating its own trade
barriers. That policy will be good for Americans and our friends
overseas. This Congress has already lead the way on Internet policy, by
insuring that the United States imposes no duties on Internet commerce.
We should also encourage the enforcement of contracts here and abroad.
Free trade and capital mobility are close to J.P. Morgan's heart
and to its history. Our bank was founded as a New York affiliate of a
London merchant bank. Free trade in financial services between England
and the United States permitted us to adapt to new business conditions.
After the War Between the States, we move our headquarters from London
to New York but continued doing business in both places. We have never
lost our international character.
We understand the U.S. economy and the world economy and the
growing links between the two. Just as we channeled foreign capital
into the emerging U.S. economy in the 1800s, so, in recent years, we
have helped Americans find promising investments in other parts of the
world. Our business has been stimulated by globalization--the
inexorable liberalization of trade flows over the last 50 years and
capital flows over the last two decades. We believe these are powerful,
important and highly desirable trends.
In the next few minutes, I would like to touch on two topics. One
is the benefit of free trade; because others have made the case before,
our statement will be brief. The other topic is trade in financial
services, in which we have a more direct stake.
Why do we favor free trade?
Few things have survived the test of time better than the economic
case for free trade. Economists of all political stripes have made that
case, from Nobel Laureate Milton Friedman to MIT's Paul Krugman.
Dropping trade barriers enables producers and consumers to buy and sell
freely. Consumers save money and have more choices, resources flow to
their most efficient use, and human beings are happier because they get
to do what they want to do as government steps out of the way.
Reducing trade barriers is an increasingly accepted goal among
nations. But, in the short run, some individuals and businesses will be
hurt as they adjust to competitive changes. Of course, business
conditions change every day. We run out of some resources, we invent
better ways to do things, old jobs disappear and new ones must be
found. Whaling ships don't set sail from New Bedford, Massachusetts,
anymore. We've found cheaper sources of energy--and new jobs--pumping
oil from the seabed off the Louisiana shore.
The ``creative destruction'' of the marketplace requires
adjustments that dwarf the disruptions that are caused by breaking down
of trade barriers. Change will sweep across the American workplace over
the next decade as e-commerce grows. That will cause far greater
disruption than would the dropping all U.S. trade barriers. But no one
would repeal the Internet.
The benefits of free trade are so great that, in 1963, when he
wrote Capitalism and Freedom, Milton Friedman urged America to move
unilaterally to free trade. ``We are a great nation, and it ill
behooves us to require reciprocal benefits' from other countries, he
said. Let us set the pace.''
Friedman pointed to Hong Kong, where thousands of newly arrived
Chinese refugees were hard at work, as a rare example of a country with
low trade barriers. And it was still true last year; The Index of
Economic Freedom, published by the Wall Street Journal and the Heritage
Foundation, gave Hong Kong the highest rating for free trade policies.
What happens to the countries that follow a free trade policy? In
1970, a few years after Friedman wrote his book, per capita GDP in the
Hong Kong colony was $957--only 43 percent of per capita income back in
the United Kingdom. In the next three decades, the income of Hong Kong
people went rocketing up. Last year per capita GDP there hit nearly
$25,000. The free trade policy, and other sound policies, drove income
up so rapidly that citizens of Hong Kong now have higher GDP per capita
than those in the United Kingdom where trade is not as free.
That fact is a good reminder that free trade for the United States
is most important because it will raise the living standard for
American workers.
Financial services
Let me turn now to our own industry, financial services. For most
of this century, financial services have been a protected industry,
both in the United States and other countries. Barriers to free trade
in financial services have taken many forms. They include capital and
exchange controls, restrictions on foreign ownership, and taxes on
foreign investment. We believe these obstacles to free exchange should
be reduced and eliminated. Fortunately, the past two decades have
witnessed substantial liberalization of financial services, to the
point where financial services were included in multilateral trade
negotiations following the Uruguay Round, which concluded in 1994.
Mr. Chairman, we are now on the threshold of an even more
fundamental advance. The Financial Services Modernization legislation,
which you and Chairman Bliley have worked so hard to pass, will soon
become law. The law will not simply tear down barriers that separated
American financial firms from each other; it will tear down barriers
that prolonged the separation of American financial markets from the
rest of the world. We are headed back to the future, toward an era of
competitiveness and opportunity similar to the time when J.P. Morgan
was formed.
The trend today is toward free trade in financial services, despite
occasional crisis-induced backsliding. Including financial services in
the World Trade Organization agenda should only hasten this trend. Even
where barriers continue to exist, they tend to be eroded by financial
activities that place offshore. Offshore arrangements might not be the
most efficient solution, but they are a means for beneficial activity
to take place. Formal barriers are less and less important as obstacles
to free trade in financial services.
Instead, our experience is that some of the most significant
barriers to international financial trade consist of differences among
countries as to the enforceability of contracts and of the sanctity of
contracts in general. We believe financial relationships, wherever they
occur, should be governed by the following principle: when two parties
agree to a contract, each party should be able to rely on the
performance of the other. Once that is gone, once a party with second
thoughts can exit the contract without making the other party whole, a
crucial foundation of our financial system is gone. If contracts are
not consistently enforced, even an otherwise totally open market would
not be attractive.
Hand in hand with upholding the sanctity of contract is adherence
to the rule of law. Courts should decide cases on their merits, and not
on other factors such as social policy objectives, ideological
leanings, or a desire to avoid offending one's countrymen. An
environment in which courts cannot be relied upon to adhere to the rule
of law is an environment in which businesses will be reluctant to
invest, and in which development will be stunted.
Sanctity of contracts and the rule of law are a cornerstone of free
trade. It should be US policy to foster those values at home and
abroad, because you cannot build financial markets without this
foundation. Not all trade barriers are explicit barriers, such as
tariffs, quotas, and ownership restrictions. Some consist of procedures
that, while appearing to treat all the same, favor domestic
competitors; others may consist of standards or restrictions that,
while billed as protecting workers or the environment or safety and
soundness, have the effect of excluding foreign goods and services.
U.S. trade negotiators and international trade bodies should draw
attention to the importance of sanctity of contracts and the rule of
law to trade and investment.
What other possible impediments to free trade should concern U.S.
negotiators? Obstacles to commerce on the Internet would be a major
blow. Leading financial firms have taken note of the potential for the
Internet and electronic commerce in general to change drastically the
way we do business. There is a general awareness among banks and other
financial services firms that they ignore e-commerce at their peril.
The Internet has tremendous potential for at least two reasons: First,
it will change the way many clients interact directly with banks. And
second, by automating transactions it will reduce the costs and risks
of our businesses. Before long, the volume of financial transactions
handled over the Internet will be a substantial part of the whole. But
it is also possible that, if states or other governments impose tariffs
on internet transactions, many of the benefits of e-commerce will be
lost. Further, since the Internet is not confined to international
boundaries, barriers at the state level could have international
repercussions as well. We believe there should be no tariffs on the
Internet, and we commend the U.S. Trade Representative for pursuing
this policy.
Conclusion
Mr. Chairman, we appreciate the fact that the Administration has
taken a leading role in encouraging the liberalization of trade policy.
We are glad this Committee is overseeing those efforts. We hope to see
further progress as a result of the Seattle meetings and the Millenium
Round.
Mr. Tauzin. Thank you very much, Mr. Brickell.
Next is Tim Regan of Corning.
STATEMENT OF TIMOTHY REGAN
Mr. Regan. Thank you, Mr. Chairman.
I am here wearing two hats. One is for Corning and the
other is for a group called the Labor/Industry Coalition for
International Trade. This is a group of firms and trade unions
who share a common interest in the promotion of good, high-wage
jobs in America's manufacturing sector.
Mr. Tauzin. Give us an example of some of the companies and
unions involved?
Mr. Regan. The glass workers and the communications workers
are members. The AFL-CIO is no longer a part of it. The
chemical workers are in it. The steelworkers are in it.
On the firm side, we have companies like Corning. We have
Bethlehem Steel and Daimler-Chrysler. We have had a number of
other groups involved in the past that, for a variety of
reasons, are not today. We have had Motorola and Intel, folks
that really make things here and are interested in exporting
and promoting, if you will, high-wage jobs in America,
manufacturing. And, as you know, manufacturing jobs generally,
on average, pay higher wages than service sectors, many service
sectors in the economy.
So it is a field which we believe has been neglected
traditionally in U.S. trade policy, and we can't afford to
neglect it.
I am not going to read any statement because a lot of
things that were said we agree with as a group and I agree
with. And some we don't agree with.
We think that the issue of trade is more complicated than
free trade versus protectionism. It is really much more
complicated. It is really the question of fairness. And, as my
colleague just pointed out, the sanctity of contracts
ultimately is an issue of fairness. And the question of whether
or not countries can engage in injurious dumping and injurious
subsidies is also a question of fairness, and we think that the
system has to deal with these issues of fairness by
establishing good, sound rules that will allow entities to
compete fairly against one another in the world market.
We are very concerned--the Labor/Industry Coalition for
International Trade is very concerned that the administration
and the United States will be under tremendous pressure to
weaken these fundamental statutes, both statutes that exist in
the international system today and in the United States.
There is no news. The Asian countries, the developing
countries are putting this pressure on the United States
because they want to be free to dump in this market or
subsidize in this market with impugnity. And we are concerned
because the United States was exactly in this position in the
Uruguay Round, and the United States said we are not going to
weaken the laws. But in the end, in the final hours, and I was
there in Geneva at the time, the United States buckled and
conceded and made major concessions which have fundamentally
undermined the effectiveness and the ability of the U.S. firms
and workers to seek relief.
Mr. Tauzin. Can you give us a couple of examples?
Mr. Regan. One is sunset. Under U.S. law if you can prove
that you face injurious dumping, you can get relief, and the
relief comes in the form of antidumping duties, and the case
also holds for subsidies.
The United States agreed as a matter of law it would cap
relief at 5 years, no matter what. It was a random negotiated
number that came out of the blue. Now if you happen to be in
the crawfish industry back in Louisiana and you file a dumping
case, which your constituents did 2 years ago, and they win,
and they pay a half million dollars to win the case, they get
relief, but they get relief for 5 years, and in 5 years they
have to go back and fight it all over again.
Now, in these--these fights that occur over and over again
cost the industries a tremendous amount of money to litigate.
And again, there is no special number here. Five was literally
taken out of the air. It was a negotiated limitation.
The fact of the matter is that a lot of these firms don't
have the resources to go back and fight these orders again. So
the system has essentially been capped at 5 years. I know that
one of the industries we are involved in, we have decided not
to pursue the defense of sunset because of the cost associated
with doing it and the likelihood of succeeding. The likelihood
of succeeding is extremely low.
So I think that it is very important that the Congress send
a signal--and I know that you just voted on this issue across
the street, and it is truly unfortunate that essentially we
send a message to the rest of the world that when Charlene
Barshefsky goes in there and says, I am not going to negotiate
an unfair trade, they are going to say, why not. She is going
say, because the Congress is against it; and they are going to
point to those votes and say, why didn't they pass a nonbinding
resolution to tell us that they are not willing to vote for it.
I think we have now set ourselves into a course of events
which is going to make it more difficult for her, not less
difficult for her going forward. And I don't mean to be
critical.
I should also add that your points this morning about
indirect taxes are absolutely right on the mark. You couldn't
be more accurate in your perception. The fact that we have
these--face these indirect taxes on our exports and then we
face rebates of indirect taxes on products coming into the
United States is a fundamental issue. I would say it is
probably the biggest barrier that we face in the world.
Because when we show up in Brazil with fiberoptics, we are
showing up there having paid our 34 percent corporate income
tax. We show up in Brazil, and we get slapped with a 17 percent
tax. And our European counterparts show up, and they got their
taxes rebated at the border, and they get a 17 percent tax, but
their total tax burden is less, and it hurts. It hurts
everywhere. It is in China, Europe, everywhere we go, and today
it is a huge problem.
So I would endorse what you are trying to do strongly. I
think it is the right way to go. I think that the United States
ought to take a stand and tell the world either we are going to
fix this problem internationally or we are going to fix it at
home.
Then I would like to move on to some of Corning's concerns.
Corning is the inventor of optical fiber. We export about 50
percent of what we make, and we make it here in America, and
this is a classic case. We employ former textile workers in our
plant in North Carolina. We have 4,000 people down there, and
we are able to export because we have high returns to scale for
the manufacture of this product. We pay high wages, and this
stuff is so light you can ship it in air freight. You can have
a delivery in 24 hours anywhere in the world. It is a perfect
export product, but we face barriers everywhere we go in the
world.
Mr. Tauzin. I saw a figure that said that we lay enough
fiberoptic in America to wrap the world every year 800 times?
Mr. Regan. I don't know about that figure, but we lay about
28,000 miles a day in the world. It is quite phenomenal, and it
is being driven, to a large degree, by what has happened with
e-commerce and what happened with the Telecommunications Act.
And I will move on and use that as a segue to e-commerce.
E-commerce is huge. Whether it continues to be developed
around the world at the pace it has been developed around here
depends on what governments do to inhibit it, and there is the
propensity to inhibit it, and is much greater overseas than it
is here.
You have heard that story this morning. I want to reinforce
the notion that we want to encourage governments to keep their
hands off. It is in everybody's interest. They are going to be
better off if somebody in Brazil can sell their product in the
United States without having to necessarily have a presence in
the United States. Just like it is good for us. So it is good
for everybody for e-commerce to work.
I would also like to note that for e-commerce to continue
to prosper in the United States--and this gets off track; it
gets into the debate on telecommunications policy--we need to
move forward to get truly high-speed bandwidth capability for
residences in America. The fact is that we don't have high-
speed capability to most residences.
The Telecommunications Act has worked very effectively in
accelerating the deployment of this capability to businesses,
and all you have to do is drive down the street and see how
many different holes are dug for MFS or next level or MCI. The
other day I saw three trenches, one for each one. It was marked
in the street. That shows you what is happening. It is
happening because of what you did.
The competition for the business customers are phenomenal.
That is where the opportunity is going to be in terms of lower
prices and better quality and higher speed. But the residences
really do face a struggle. There is a lot that can be done in
terms of removing barriers to investment and adopting
incentives for investments. We have to replace about $200
billion of existing infrastructure in this country in terms of
copper wire and outmoded circuit switching to really bring it
on home.
Finally, I want to warn the committee against the prospects
of what I call unfair tariff deals. We have a peculiar
situation in telecommunications equipment, and that is that the
rest of the world can discriminate against us, and we can't
discriminate against them. The reason for that is there is a
provision that goes back to 1947 that was put in the GATT that
says that governments can discriminate in the procurement of
goods for their own use, and since most of the world has public
telephone and telegraph administrations which are owned by
their governments, these entities are free under that provision
to discriminate, and there is really nothing we can do about
it. We have faced it time and time again where we go over there
and we say we can't get in the door because they have a buy
national policy, and we have been told, unfortunately, that is
okay, it is a loophole.
Any tariff deal in the United States on which we agree to
eliminate our tariffs and telecom equipment which does not
involve a comprehensive deal to get at tariff and nontariff
barriers overseas, particularly the discriminatory procurement
provision or loophole, is tantamount to unilateral disarmament,
and we ought not to do it.
Thank you very much.
[The prepared statement of Timothy Regan follows:]
Prepared Statement of Timothy Regan on Behalf of the Labor Industry
Coalition for International Trade and Corning Incorporated
I appreciate this opportunity to testify on the Seattle Ministerial
and the proposed new round of WTO talks. I am wearing two hats today--
one for Corning, a world leader in telecommunications, where I am Vice
President for Government Affairs, and one for the Labor/Industry
Coalition for International Trade (LICIT), of which Corning is a
founding member.
i. licit's concerns
For two decades, LICIT has brought companies and unions together in
support of increased and equitable international trade. Companies and
unions affiliated with LICIT include: American Flint Glass Workers;
AMT--The Association for Manufacturing Technology; Bethlehem Steel
Corp.; Communications Workers of America; Corning Incorporated;
DaimlerChrysler; International Brotherhood of Electrical Workers;
Milacron Inc.; Paper, Allied-Industrial, Chemical & Energy Workers
International Union (PACE); Union of Needletrades, Industrial and
Textile Employees (UNITE); and United Steelworkers of America/United
Rubber Workers Conference.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ Members do not necessarily associate themselves with every
LICIT report or recommendation.
---------------------------------------------------------------------------
The goal of the Seattle Ministerial is to launch and set parameters
for a new round of multilateral trade negotiations. The agreed ``built-
in agenda'' for these talks involves revisions to the existing WTO
rules on agriculture trade, services trade and intellectual property.
There is much that the United States can and should seek to accomplish
in these areas. However, none of these positive results can be achieved
unless the United States resolutely blocks efforts by a handful of WTO
Members to go outside this agreed list of topics and reopen debate over
the WTO's antidumping and anti-subsidy rules.
Antidumping Rules Should Not Be Reopened
Antidumping and antisubsidy rules are a pillar of the multilateral
trading system. From its inception, the GATT has provided that
injurious dumping ``is to be condemned'' and has provided for remedies
to offset and deter dumping and trade-distorting government subsidies.
These rules are designed to ensure a basic level of fairness in
international trade and to prevent abuse. The clear intent of the
countries who want to reopen these rules, however, is to weaken them.
Allowing this effort to succeed would inevitably lead to abuse of the
world's open markets--including that of the United States, the world's
most open market--and would rapidly undermine confidence in the WTO.
As the United States observed in a 1998 submission to the WTO
Working Group on the Interaction between Trade and Competition Policy,
the antidumping remedy is:
necessary to the maintenance of the multilateral trading
system. Without this and other remedial safeguards, there could
have been no agreement on broader GATT and later WTO packages
of market-opening agreements, especially given the
imperfections which remain in the multilateral trading system .
. . [T]he antidumping rules represent an effort to maintain a
``level playing field'' between producers in different
countries . . . [and] are a critical factor in obtaining and
sustaining necessary public support for the shared multilateral
goal of trade liberalization.
From the standpoint of the trading system, there is no reason to
reopen these rules in a new round, and there are many reasons not to do
so. First, the current rules were concluded only with great difficulty
during the Uruguay Round, have hardly been tested, and certainly have
not proven defective. Another divisive fight over antidumping would
only make the new round impossible to conclude, or its results
impossible for the United States to ratify. Second, there are many new
users of antidumping laws, often developing countries, trying to come
into compliance with Uruguay Round rules. What is needed is a period of
repose and certainty, not continued shifting of the rules which could
spur confusion and negatively affect all WTO Members' exports. Third,
antidumping measures affect only a tiny fraction of world trade. Where
applied, they simply ensure a modicum of fairness, but even if that
were not the case, it would hardly be plausible to argue that use of
antidumping is a major problem in international trade. There is other,
much more important, work to do in Geneva.
Permitting these rules to be undermined would not only put the
trading system's prior accomplishments at risk and preclude progress on
the core WTO trade agenda; it would also rob U.S. industries of their
last remaining remedy against injurious, unfair trade. Chairman Tauzin,
your own crawfish industry in Louisiana has been beset in recent years
by dumping and would have been defenseless without an effective
antidumping law. Likewise, Louisiana's softwood lumber industry would
have had no remedy to huge Canadian subsidies without a strong and
effective CVD law.
You can imagine our concern, then, upon learning last month that
the incumbent WTO General Council Chairman, Ali Mchumo, had released a
draft ``Declaration'' for the Seattle Ministerial with a lengthy list
of proposed changes to WTO dumping and subsidy rules--changes that
would, if adopted, eviscerate the U.S. fair trade laws and the relief
those laws provide to domestic industries injured by dumped and
subsidized imports. The Mchumo draft recites almost verbatim a series
of negotiating demands tabled by countries seeking to alter the deal
they signed in the Uruguay Round. Although clothed as suggestions
relating to ``implementation'' of the Uruguay Round rules, these
proposals actually seek to reopen those rules and dramatically alter
the balance of rights and obligations achieved in the Uruguay Round.
While many of the Mchumo proposals are designed to provide special
benefits for developing countries, some of the worst proposals apply to
all countries and would introduce a bias in international trade rules
favoring all dumpers and subsidizers. Meanwhile, the special rules
proposed for developing countries are both dangerous--they would
provide a license and a road map for engaging in unfair trade--and
unnecessary since the claim that developing country exports are being
shut off by trade remedy measures has no basis in fact. In the last
official study by the U.S. International Trade Commission, no
developing country in the GATT system had even 1% of its U.S.-bound
exports subject to antidumping orders. The Mchumo draft, however,
proposes such far-reaching changes as:
<bullet> requiring national authorities to impose duties that are less
than the calculated margin of dumping or subsidy;
<bullet> slanting the Antidumping Agreement's criteria on product
comparisons and exchange rate shifts so as to minimize or erase
dumping margins;
<bullet> exempting developing countries altogether from discipline on
the worst forms of subsidies--export subsidies and import-
substitution subsidies;
<bullet> sharply increasing the already-liberal de minimis dumping,
subsidy and market share thresholds below which trade remedies
cannot be imposed on developing country products; and
<bullet> imposing lengthy moratoriums on antidumping actions in
particular sectors such as textiles and apparel.
Several of these ideas were floated in the Uruguay Round and were
soundly rejected. There was no basis for them then, and there is none
now. Yet, Mr. Mchumo has proposed many amendments to take effect
immediately--as if a basis for them had somehow already been
established, which plainly is not the case.
The Mchumo draft represents an assault emanating from the WTO
itself on the U.S. trade laws and on the international rules of fair
trade which underlie U.S. acceptance of the WTO agreements. This is not
what America bargained for when it joined the Organization and ratified
the WTO agreements.
Forceful intervention by Congress is urgently needed. The most
important and immediate step is to pass H Res. 298--introduced last
month by Reps. Visclosky and Ney--which directs the President to refuse
to participate in any new negotiations on antidumping and anti-subsidy
rules, and to refrain from submitting to Congress any agreement that
might undercut current U.S. trade laws or enforcement practices. By
passing this important measure, Members of Congress can bolster the
existing U.S. position and send a strong message that Congress will not
tolerate attacks by or within the WTO on our fair trade laws.
The Commerce Committee and this Subcommittee have traditionally
supported America's manufacturing base and the fair trade remedies
which are essential to keeping that base healthy. Unfortunately, fewer
than half the members of the Committee are presently signed on as co-
sponsors of H Res. 298. LICIT respectfully urges those Committee
members who have not signed on to join the more than 220 of your
colleagues in the House who have stood up for America's working men and
women by co-sponsoring this important measure.
The resolution reaffirms existing U.S. policy as articulated by
both the Congress and the Administration. Here in the House, the
Committee on Ways and Means, in 1997 approved and reported out a
provision instructing U.S. negotiators to reject any agreement that
would weaken current disciplines against dumping and subsidies:
In the course of negotiations conducted under this title, the
United States Trade Representative shall-- . . . preserve the
ability of the United States to enforce rigorously its trade
laws, including the antidumping and countervailing duty laws,
and avoid agreements which lessen the effectiveness of domestic
and international disciplines on unfair trade, especially
dumping and subsidies . . .
Formalizing this position through prompt passage of H Res. 298 will
provide crucial support to the Administration as the Seattle
Ministerial approaches and send a strong message that the Congress is
not prepared to compromise the effectiveness of our fair trade laws.
Reforms to the WTO Dispute Settlement Understanding (DSU)
Experience during the last 5 years has highlighted the need for DSU
reforms. These reforms, which were supposed to be completed by the end
of 1998 as a result of a review scheduled in 1994, are essential if the
WTO and its dispute settlement mechanism are to succeed in the new
Millenium.
The key U.S. priority at this point must be ``defensive'' concerns.
Although the United States has been more frequently a complainant than
a defendant, this pattern cannot be expected to continue, and there is
now an alarming pattern of attacks on U.S. trade law measures coupled
with panel decisions fabricating new restrictions on those measures
which were never accepted in negotiations. The United States should
therefore insist that any legal instrument extending the DSU (1)
reaffirm the critical importance of the Antidumping Agreement standard
of review, and (2) expressly clarify the applicability of that standard
to CVD disputes.
The United States should also seek reform in the following areas:
<bullet> Transparency. A revised DSU should require Members
participating in dispute settlement proceedings to submit,
promptly after each submission to a panel, a public version
sufficient to permit a full understanding of the arguments. It
should also require panel and Appellate Body meetings to be
open to all WTO Members and to the public, and should allow
affected private parties to participate in panel proceedings.
These changes will enhance the credibility and performance of
the system while allowing governments to utilize fully the
resources and expertise of private parties who have the most
direct stake in WTO cases.
<bullet> Limits on the WTO Secretariat's role. Secretariat officials
often have strongly-held personal views on how to interpret
agreements they participated in drafting, and in many cases
they do not agree with the substantive rules which it is the
responsibility of panels to enforce. It is not appropriate for
these officials to be involved, other than perhaps in a purely
secretarial capacity, with the work of dispute settlement
panels. The Secretariat does not exist to espouse positions
attacking individual articles of the GATT, or to side with
particular Members who want to rewrite the existing rules in
particular subject areas. This has already been a problem in
WTO dispute settlement, and if not corrected it threatens the
system's credibility and future.
ii. corning's concerns
E-commerce
Now I would like to address the issues before the Committee in
which Corning has a significant concern. As you know, Corning is the
inventor and world's leading manufacturer of optical fiber and photonic
components. We are thus greatly affected by both globalization and
convergence, the two major driving forces of our time in the world
economy.
The power of convergence--that is the combined use of computing and
networking--has brought E-commerce to the forefront. In the last two
weeks alone, E-commerce has been the subject of feature articles in
such widely read weeklies as Time and Fortune. It is indeed a
phenomenon that is affecting the way we work and the way we play--the
ultimate realization of the value inherent in the information economy.
Whether E-commerce continues to evolve at a rapid pace will depend
on whether governments worldwide take steps to constrain it.
So far, in the United States, we've done a good job of nurturing it
by virtue of our willingness to trust the marketplace and to avoid
excessive regulation. Our challenge now is to ensure that ``true
broadband,'' as opposed to wideband solutions like ADSL, is deployed to
every business and to every home in America as soon as possible. This
will require additional measures by government to eliminate barriers
that are inhibiting deployment and to adopt technology neutral
incentives to accelerate deployment.
On the international side, we need to adopt an aggressive program
to move E-commerce into the forefront of the discussion for the WTO
Ministerial. It is critically important that Ministers agree in
principle to refrain from taking any measures that restrict or inhibit
the development of E-commerce. They need to adopt four specific
commitments to keep E-commerce ``barrier-free,'' an environment which
will enable this new phenomenon to develop at an optimal pace to the
benefit of the world economy.
At Seattle, the Ministers must:
<bullet> agree to continue May 20, 1998 Moratorium on Customs Duties on
Electronic Commerce for at least the duration of the New Round,
and to clarify that the exemption from tariff applies to both
the transmissions themselves and their contents;
<bullet> reaffirm that current WTO obligations, rules, disciplines, and
commitments apply to E-commerce, just as they do to trade in
goods and services;
<bullet> commit to refrain from taking measures as a matter of domestic
policy that would inhibit growth of E-commerce and, when
domestic regulatory action is necessary, adopt only those
measures which are the ``least trade distortive''; and
<bullet> initiate a process to establish a new ``Trade Framework for
the Information Economy'' to integrate the disciplines of the
WTO throughout E-commerce.
It is important to emphasize that these are commitments in
principle, not legally binding obligations. These commitments encompass
an approach for embracing E-commerce based upon limited government
intervention which we believe has worked enormously well for the United
States and will do the same for others.
Imbalanced Tariff Deals
I might also add a special point of concern which I believe affects
all U.S. telecommunications equipment manufacturers. We face an
unbalanced situation in the world. Our market for telecommunications
equipment is wide open, while foreign markets for our equipment remain
highly restricted.
The only barriers we have left are relatively small tariffs. The
rest of the world, however, has tariffs plus non-tariff regimes which
discriminate against our trade. Some of these non-tariff measures are,
frankly, WTO consistent because there is a huge loophole in the system.
This loophole allows public telephone and telegraph entities, which are
owned or controlled by their governments, to discriminate against
imports with impunity.
Since the United States has no government-owned public telephone
and telegraph administrations, we simply have no means to engage in
such WTO legal discrimination. The carriers that buy telecommunications
equipment in the United States are privately-owned entities that
purchase purely on the basis of commercial considerations--price,
quality and delivery--not on the basis of national origin.
This inherent discrimination in the world trading system against
American manufactured telecommunications equipment is problematic. In
light of it, any decision on the part of the United States to eliminate
U.S. tariffs on telecommunications equipment must be matched by a
commitment on the part of other countries to eliminate both tariff and
non-tariff barriers. Otherwise, any tariff deal is unbalanced and
tantamount to unilateral disarmament.
iii. conclusion
The built-in agenda for the next round is an important one. There
may also be other WTO issues on which the United States can and should
seek progress at Seattle and in the talks that follow. However, to
achieve a result that will enhance U.S. trade objectives and the
welfare of America's working men and women, it is essential that the
United States defeat any and all efforts to weaken the existing fair
trade rules of the WTO. In practice, this means that those rules should
not be reopened at all.
LICIT looks forward to working with this Subcommittee, with the
Congress as a whole, and with the Administration to ensure that the
promise of the upcoming multilateral talks is not squandered through a
useless and unwise debate over antidumping rules.
Mr. Tauzin. Thank you, Mr. Regan.
And, finally, Mr. Brant Free, Senior Vice President of
International External Affairs of The Chubb Corporation here in
Washington, DC.
STATEMENT OF BRANT W. FREE
Mr. Free. Thank you, Mr. Chairman.
Like my good friend Tim, and he is always chiding me for
being from the services sector and not from manufacturing, I am
wearing two hats this afternoon also.
Chubb is a high-tech insurance company which operates in 35
countries around the world but has business in 110. Aside from
selling insurance and other financial services products, we
view ourselves as a bridge for U.S. exporters to get their
products around the world into markets in which they have to be
insured, and the same for investments. We can help companies
get into markets, small and medium-sized companies who just
don't have the skill and knowledge about the environment that
they are going into.
I am actually here more importantly representing the
Coalition of Service Industries. The chairman of Chubb is the
chairman of the Coalition, and the more than 60 member firms
and trade associations of the Coalition cover all of the
sectors--subsectors of services that Joe Papovich outlined this
morning.
Mr. Tauzin. Give us some examples of the companies
involved?
Mr. Free. Aetna, America on-line, Bank of America, Boeing,
Dow Jones, EDS, Goldman Sachs, IBM, the Investment Company
Institute, MasterCard, Visa, American Express, Ford Financial
Services Group. We have got the American Consulting Engineers
Council, the American Council of Life Insurance.
Mr. Tauzin. You are speaking for all of them? I should have
put you first.
Mr. Free. We don't speak for them on all subjects, but
luckily in the services sector we have had a common voice with
some variations by sector.
We have made a lot of progress, as you pointed out this
morning, at getting success for services, but when Tim and I
first met each other and I was a trade negotiator in the U.S.
Government, they called services the new issue, and it is now
20 years old.
We did have a good success, frankly, in getting a services
agreement in the Uruguay Round and subsequent agreements on
financial services. And the companies that are members of the
Coalition were strong supporters of those agreements, but in
all reality they broke no new ground. Yes, they created a
framework for dealing with services liberalization down the
road, but in fact most countries of the world only made offers
that reflected the level of liberalization they already
achieved or even committed themselves to, less than the level
of liberalization that they achieved. So the negotiations ended
up being an exercise in how you write down your commitments,
not give and take, we will do this if you do that. So
liberalization generally was not achieved except in very
limited circumstances; and, more ironically, the liberalization
is really in investment in the establishment side of the
equation, not the cross-border sale or export of services.
When I first started out many years ago working on this
issue, we first raised the question, could services be in GATT?
We were told, no, services are not goods. There is no room for
services in GATT. They are very different.
We got past that obstacle, and we were talking about trade
in services, including establishment questions. And the
reaction of the trade policy people was, but GATT doesn't deal
with investment, it only deals with trade and cross-border. But
in the final deals we really dealt with the establishment
issues, not the cross-border issues.
Financial services which is the sector I represent. Within
the Coalition there is a separate financial services group. In
building support for international agreements, we have
developed a financial leaders group which includes the CEOs of
financial firms from Europe, North America, from Latin America
and Asia. But when we raised financial services after crossing
all of these other barriers, we were told financial services
were so different they couldn't be in the GATT either, but
ultimately succeeded.
Why am I going through that? To bring you to where we are
today and to really cut to the quick.
Yes, in this next generation agenda, now that we have
legitimacy for services as a negotiating area, we really do
want to see real market access and liberalization provisions.We
want to see some real negotiations where, as a result, you get
market opening you didn't have before.
E-commerce. E-commerce has an extraordinarily important
impact on virtually every service sector, just like it does
every business in the United States, and we are working on
those issues. But the particular cut for us beyond taxation,
jurisdiction, definition, becomes the question of what do you
do with regulated industries. And I will in a minute tell you
or talk a little bit about pro-competitive regulatory reform,
which is where we want to move to next. In fact, let me move
there now.
The Internet, from an e-commerce perspective, if you are an
insurance company operating in the United States and you run a
web page, it can be accessed by anyone anywhere in the world.
What if someone wants to buy one of your policies but they are
residing in France? It would be an illegal transaction for us
to sell an insurance policy to a French individual because
there is no international agreement about where the point of
sale takes place and who has jurisdiction over that.
From a practical point of view, we have had one example,
and it was in the securities area. The Securities Industry
Association asked the British Financial Services Authority how
they would view advertisements on the Internet aimed at the
U.S. audience but could be accessed by the United Kingdom
residents. And they were told that, under U.K. provisions,
whether it was intended for a U.K. audience or not, by virtue
of its availability on the Internet that the securities
industry must conform to U.K. standards of advertising,
marketing and whatever simply because someone could access a
U.S.-focused advertisement through the Internet.
That just begins to show you the problems that we face.
And again, as I point out, they are particularly in
financial services but in other areas of services, since there
were so few deals on allowing cross-border trade, this brings
this matter very much to a head.
And that takes me to the real focus that I have here today,
which is pro-competitive regulatory reform. We talked a bit
about the telecom reference paper, but it has become clear to
us in financial services, and I won't speak specifically for
the insurance industry, that unless the next round begins to
deal with regulatory barriers to your operations in a foreign
market, that market access in itself can be completely
meaningless.
The best example is the U.S.-Japan insurance agreement. You
are aware of it. It has been in existence for 5 years, and it
has been a bone of contention. I should say that the Japanese
are moving to deregulate in the way that we want to see them
go. But what I want to point out here is to define what we mean
by pro-competitive regulatory reform.
We are not suggesting that regulators should not regulate
financial markets. What we are saying is that they ought to
focus on the solvency of their institutions, certainly on the
consumer issues about adequate information and consent.
But in the case of Japan, and this is prevalent throughout
many parts of the world, in the Japanese system you could not
issue, Chubb Japan, a new insurance policy unless it was turned
over to the local trade association for approval; and the local
trade association then recommends to the Japanese government
whether a policy can be issued with new provisions, something
new for the Internet, something new for a power plant,
something new for the software sector.
Well, of course they have got all of your commercial
information. They design their own policies. The Japanese
government approves your new policy when all of your
competitors can issue it. They further control price so you
have neither the ability to innovate on product or price.
So this is what we mean by pro-competitive regulatory
reform. You heard Joe Papovich say this morning that they are
going to include regulation in the three points of the services
program that the U.S. is pushing in Seattle. He referred to
transparent and fair regulation. We don't have a definition of
what fair is. And most of our discussions with our own
regulators and through USTR and through the Treasury Department
have indicated a real reluctance to want to support this
effort, much as they did not want to originally support
financial services in the GATT agreement.
We find this very shortsighted because, in most cases, the
U.S. market has a very good record in this area. We would have
little to give up and much to gain if we could introduce our
new products and price them to market abroad. So for us in the
Coalition of Service Industries and in the financial services
sector, this pro-competitive regulatory reform is an issue
whose time has come.
Joe mentioned this morning that he spent 3 days at the
World Services Congress. This is the first time that such a
Congress has ever been held. It was in Atlanta. My company
happened to be the host, and the Coalition of Service
Industries was the major sponsoring group. Seven hundred
business, government and academic leaders gathered from around
the world to talk about the next round and to set an agenda for
the ministerial.
Part of that agenda that came out over and over again,
whether it was airlines and other parts of transportation, air
courier, financial services or professional services, was we
need to get regulatory reform on the GATT agenda--or the WTO
agenda. That doesn't mean the WTO should become the regulator,
but it means, just as we have in product standards, health
standards for goods, there ought to be some negotiated
boundaries around which regulators of the various service
sectors can operate. Their regulations should be appropriate to
the purposes for which they are intended and should not be for
protectionist purposes.
We are going to need Congress's help. Again, I have been
around long enough to know that we would never have had
services in GATT if it was not for Congress. We would never
have had financial services in the WTO had it not been for
Congress. And it is critical for us now that we get the
Congress interested in this area of regulatory reform in
foreign markets so when we negotiate market access we can then
develop and introduce new products at market-based or flexible
pricing.
Thank you.
[The prepared statement of Brant W. Free follows:]
Prepared Statement of Brant W. Free, Senior Vice President
International External Affairs, The Chubb Corporation and the Coalition
of Service Industries
It is a pleasure to appear today to testify on behalf of The Chubb
Corporation and the Coalition of Service Industries (CSI) on WTO 2000:
The Next Round. I look forward to the opportunity to speak, in
particular, about the private sector's objectives for services at the
Seattle WTO ministerial meeting, and the Services 2000 negotiations
scheduled to begin this coming January.
First, I would like to tell you about Chubb and why we are so
interested in these issues. The Chubb Corporation is a global specialty
property and casualty insurance company with offices in 32 countries.
Last year, over 25 percent of our premium dollars came from our
operations located outside the United States. Over the next few years
we expect this to increase to one-third. It is critical to our future
growth that Chubb is able to enter foreign markets and compete on a
level playing field with domestic insurers as well as other
international competitors and the WTO negotiations are an essential
part of assuring that we have this opportunity.
My Chairman, Dean O'Hare, is also the Chairman of the Coalition of
Service Industries. CSI was established in 1982 to create greater
public awareness of the major role services companies and their workers
play in our national economy; promote the expansion of business
opportunities abroad for US service companies; advocate an increased
focus on liberalization of trade in services in international trade
negotiations; and encourage US leadership in obtaining a fair and
competitive global marketplace.
CSI members include an array of US service industries including the
financial, telecommunications, professional, travel, transportation and
air cargo, and information technology sectors. Included in the broader
coalition of sectors with which we work are energy services,
entertainment, retail distribution, and education.
CSI has been active in multilateral trade negotiations since before
the Uruguay Round and has played an aggressive advocacy role in writing
the General Agreement on Trade in Services and obtaining successful WTO
negotiations in telecommunications and financial services.
Services 2000 Negotiations
We are equally committed to a comprehensive, highly ambitious new
multilateral services negotiation starting in 2000. We believe that
these negotiations will further expand our global markets, enabling our
sector to increase its 77 percent share of US employment, its 79
percent share of GDP, and its trade surplus of about $80 billion (about
30 percent of US exports). Because foreigners have a high propensity to
consume US services, we believe that negotiations that reduce barriers
across a wide range of highly protected foreign services markets could
materially stimulate US trade. The US is very competitive in virtually
every category of services trade, examples of which are given in the
appendix to this statement.
It has recently been suggested that US services exports could
offset the structural goods deficit as a result of successful
multilateral negotiations. Catherine L. Mann, in a study for the
Institute for International Economics \1\ wrote:
---------------------------------------------------------------------------
\1\ Catherine L. Mann, ``Is the U.S. Trade Deficit Sustainable?''
Institute for International Economics, 1999, p. 9.
---------------------------------------------------------------------------
``. . . as income in a foreign country grows, its imports of US
services tend to rise disproportionately. Successful broad-
based negotiations on trade in services will likely increase US
exports of services even further, with a positive effect on the
trade deficit. The long-term trajectory of the US external
balances could be altered significantly by the combination of
successful service-sector negotiations and broad-based
liberalization and deregulation at home and especially abroad.
These together would unleash higher productivity and faster
growth at home and abroad, which would narrow the US current
account deficit.''
In recent testimony before the Senate Finance Committee, Dr. Mann
cited estimates that comprehensive liberalization of services could
raise global GDP by 4 to 6 percentage points, and raise the long-run
global growth rate from 3.2 to 5 percent.\2\
---------------------------------------------------------------------------
\2\ Gary Clyde Hufbauer and Tony Warren, ``The Globalization of
Services, What Has Happened?'' Institute for International Economics,
1999
---------------------------------------------------------------------------
My point is that the United States has a powerful national economic
security interest in making the coming services negotiations a major
success. But, so does the rest of the world economy.
The Seattle Ministerial
Because we need highly successful new services trade negotiations,
we need a successful Seattle WTO Ministerial Meeting. What defines
success? For the service sector a successful Ministerial must:
<bullet> give a very strong mandate to the start of comprehensive
services negotiations in 2000
<bullet> provide that this 3 year negotiation be focussed mainly on
services, agriculture, and industrial products so that there is
a real chance that negotiators can focus on services trade and
complete an ambitious agenda of liberalization in areas where
the likelihood of liberalization exists.
<bullet> recognize that electronic commerce is an important new
technique for trading, not a new sector in and of itself;
extend the existing moratorium on duties on electronic
transmissions, call on countries to refrain from adopting
measures that would unnecessarily restrict electronic commerce,
provide that electronic delivery of services falls within the
scope of the GATS, and that there be no discrimination among
foreign and domestic providers in their access to electronic
networks.
<bullet> provide that the entire new ``round'' be completed by December
31, 2002, in order to force closure on the existing agenda,
reap what gains can be garnered, and begin again with a fresh
agenda that could include items like investment.
CSI has been very actively engaged in the preparations for the
Seattle Ministerial. We are organizing a day of activities during the
week of the Ministerial to demonstrate the importance of the service
sector to the 21st Century, knowledge based, ``third wave'' economy. At
our major ``World Services Congress'' in Atlanta, which began this past
Sunday and just wrapped up yesterday, over 800 people from services
companies and organizations around the world developed a series of
recommendations to support and guide the Ministerial and the
negotiations to follow. Also at Atlanta we formed a Global Services
Network to link organizations and individuals in all parts of the world
and to provide a support system for the services negotiations.
Ambitious US Goals for Services 2000
CSI believes strongly that the US should enter the new negotiations
with a bold agenda, calling for sweeping commitments to liberalization
across all service sectors.
We would like our negotiators to propose broad commitments to
liberalization in areas such as the right to establish a business
presence in foreign markets (commercial presence), the right to own all
or a majority share of that business, and the right to be treated as a
local business (national treatment).
If we are to succeed, our negotiating methods will need to be bold
and innovative. We support the efforts of US services negotiators,
joined by their colleagues in the Quad and a group of other countries
with strong interests in services trade, to find new approaches to
services trade liberalization. These are designed to supplement the
usual ``request-offer'' approach, save time, and bring better results.
These new approaches could include commitments applying
``horizontally'' across all service sectors, the negotiation of
transparency and other pro-competitive regulatory commitments, and the
negotiation of model schedules for each sector under negotiation.
Countries would have the right, as they do now, to list exceptions to
the model schedules and pro-competitive regulatory commitments. Once
the models had been adopted, countries could engage each other in
negotiations to improve the scope and depth of other countries'
commitments.
Mobility of Business Personnel
One of the areas requiring fresh, bold thinking here and abroad,
includes the provisions used by countries, including the US, for the
temporary entry of foreign managerial and technical personnel.
Increasingly large, highly competitive US companies such as consulting,
accounting, legal, architectural, and engineering firms need to
transfer personnel at short notice to service the needs of their
clients throughout the world. Delivering services via transfer of
natural persons is known in GATS parlance as ``mode 4'' of supply. The
WTO has been unable to make any progress on achieving liberalization of
this form of supply of services. Because it is of increasing importance
to US firms, and to some other countries, it should be an important
element of the coming negotiations.
The Need for ``Pro-Competitive'' Regulatory Reform
Foreign companies entering new markets often face formidable
barriers in the form of arbitrary and non-transparent regulations and
regulatory institutions. Such regulations too often deny foreign
companies the opportunity to compete on an equal basis with domestic
firms. They can effectively negate the benefits of trade liberalization
commitments.
Pro-competitive regulatory reforms mean abandoning forms of
regulation by which governments limit the introduction of new products,
restrict use of market-based pricing, and constrain competition in
other ways that go beyond legitimate regulatory goals. This issue is
particularly important to my company because our real competitive
advantage has been in the development of new and innovative products to
meet the needs of customers in a wide range of specialty areas. If
regulatory regimes in a foreign country restrict our ability to quickly
develop and offer such products in their market, our opportunity to
compete with local insurers is limited.
Transparency of regulatory processes is an important element of
pro-competitive reform. This means adopting many of the procedures
embodied in our more open system of government, such as the publication
of existing and proposed regulations, and the right to comment and to
be heard in administrative proceedings. It also means applying higher
principles of how companies operate, such as regulations ensuring
solvency, promoting transparency in intra-company transactions and
financial reporting, and improving the reliability of financial data
that would allow customers and investors to make better informed
judgments.
The Need for Integrated US International Economic and Tax Policies
At the same time that we pursue an aggressive trade strategy, we
must be sure that our domestic policies do not inhibit the global
competitiveness of our own companies. A case in point is the active
financing exception to Subpart F that expires at the end of the year.
Extension of these rules permitting US-based financial services
companies to reinvest earnings overseas without first being taxed by
the US will be an important step in the right direction as we better
coordinate our trade and tax policies to foster the ability of our
companies to compete in foreign markets.
The WTO and Services
The reduction of barriers to trade in goods began many decades ago
with the 1934 reciprocal trade agreements program of the Roosevelt era.
The reduction of barriers to trade in services is in its infancy. The
Uruguay Round wrote the ``constitution'' or legal framework for
liberalization of trade in service: the GATS. But countries' actual
commitments to liberalization were disappointing. The actual work of
liberalization was advanced in the successful 1997 Basic
Telecommunications and Financial Services negotiations. The next
negotiation, services 2000, is the first real opportunity to bring to
bear the lessons we have learned about the complex process of
negotiating freer trade in services and to broaden binding commitments
across all sectors and deepen commitments within product categories and
sub categories.
As I said at the outset, the United States has a particularly big
stake in a successful multilateral negotiation. We are already highly
competitive in services. We can secure and enhance this comparative
advantage by removing restrictions to our exports, and at the same time
make a bigger and bigger dent in our structural trade deficit.
The Seattle Ministerial is a preamble to the main event, the
negotiation itself. But it is essential that the Seattle Declaration
give a strong impetus to an ambitious, achievable negotiation in
services.
appendix i
Examples illustrating the stake of US service industries in
expanded global markets.
<bullet> Travel and tourism contributed over $25 billion to the
services trade surplus in 1997. This is the largest sectoral
contribution to the overall services surplus. In addition, travel and
tourism are estimated to support over seven million direct jobs and
generate roughly $71 billion in tax revenues for federal, state and
local governments.
<bullet> Business, professional and technical services is a largely
unrecognized powerhouse in American trade. In 1997, we exported more
than $21 billion in these services and we had a $16 billion trade
surplus. These data do not include the earnings from foreign
investments and foreign affiliates, which are very substantial. Trade
in business, professional and technical services--such as accounting,
legal, engineering, architectural and consulting services--is
especially important because it frequently paves the way for trade and
investment in other service and manufacturing sectors.
<bullet> Telecommunications services are an integral component of
operations of all businesses, and are essential in promoting domestic
and global growth. Telecommunications services provide the necessary
infrastructure for the development and continued expansion of the
information society and electronic commerce. An estimated $725 billion
in revenue was generated in 1997, and projections for the next five
years indicate that traded telecommunications services will increase at
about 20 percent annually for outbound calls from the US to foreign
markets.
<bullet> The information technology industry is also dependent on
trade and trade expansion. The WTO estimates that over the next five
years, sales over the Internet will double each year.
<bullet> The US asset management industry is the largest in the
world. It is estimated that by 2002, 51% of total asset management
revenue of $160 billion will come from abroad, not the US. Today, US-
domiciled investment managers manage 14% of the total of non-US
retirement plan assets and 5% of non-US mutual fund assets.
<bullet> US law firms, when billing foreign clients, produce
services exports. Overall US legal services exports approach $1.0
billion.
<bullet> Foreign students coming to American schools, net after
scholarship and local assistance, spent $8.3 billion in the US, which
is a US services export. We have a surplus in trade in education
services of $7.0 billion.
<bullet> Although few doctors imagine themselves as US exporters,
medical services rendered in the US to foreign citizens produced an
export surplus of $0.5 billion.
<bullet> Air cargo transport accounts for well over a third of the
value of the world trade in merchandise. However, restrictions on
market access (including cabotage), ownership and control, the right of
establishment, capacity, frequencies, intermodal operations in
connection with air services, wet leasing, customs, groundhandling, the
environment in particular local airport access times, all limit the
ability of cargo carriers to plan their operations purely on the basis
of commercial and operational considerations. A WTO framework could
provide cargo carriers with clear rules addressing these problems and
resulting in enhanced delivery options to the benefit of businesses,
shippers and consumers worldwide.
<bullet> Energy services have received little attention in trade
negotiations to date. But drastic changes in the international and
domestic business climate for this industry--which in the US accounts
for 1.4 million jobs and about 7% of US GDP--have shown the need for
global trading rules, which can provide new, common understandings on
such key matters as monopoly power, anti-competitive practices and
discrimination against new market entrants, including of course US
companies. Thus the energy services industry looks to the coming round
as a critically important opportunity to map out a blueprint for market
access and free competition in energy service.
Mr. Tauzin. Thank you, Mr. Free.
Mr. Free, you mentioned the Japan insurance agreement, and
you mentioned France. I raised the question of Malaysia in the
opening statement. What is the condition there?
Mr. Free. Nothing has changed in Malaysia.
Mr. Tauzin. So we have not seen a lot of progress?
Mr. Free. There has been no progress.
Mr. Tauzin. In that regard, the panel focused on the need
for openness and transparency and fairness in the equations of
global free trade.
First let me mention that we have H.Res. 298 before
Congress and it now has 297 cosponsors. It is still in the Ways
and Means Committee, I think, but it literally calls upon the
administration not to reopen negotiations in antidumping and
countervailing. And interestingly, as of March, 1999, 90
products from 59 countries are under antidumping and
countervailing duty orders. Mr. Regan pointed out that ends in
5 years.
Mr. Regan. You essentially have to go back and reprove your
case.
Mr. Tauzin. So you have to deal with that every 5 years.
Mr. Regan. Your crawfishermen have to deal with that again
in 3 years.
Mr. Tauzin. They have 3 years left.
In regard to that, we are hearing you can't have free trade
as long as you have different labor standards, environmental
standards, regulatory standards, tax standards, or licensing
standards. You can go through a whole category of nontariff
differences among nations who might be all parties to the same
organizations and same treaties and yet end up with some very
large inequalities in terms of the way that goods and services
are produced and treated in a global economy.
Which of those, in your opinion are honest, legitimate
differences and which are not? Obviously, if one country has
more natural resources than the other, it has an advantage in
global trade. If one country has a greater information base in
the information age, it is going to have an advantage. We will
have that advantage, I think. What are the fair and what are
the unfair advantages? Should we go into this round in Seattle
arguing that some are fair and some are not fair, and which are
they?
Mr. Regan. I will try to go after that.
I used to be a trade negotiator. I spent 12 years at USTR,
and back when I started in the 1970's it was easier because we
had a lot of high tariff barriers and we knew pretty much what
the problem was. And we have succeeded. The WTO is a great
success story because we have succeeded in eliminating those
visible tariffs. And with globalization our economies are
becoming more and more intertwined. As they have become more
and more intertwined, the fabric of domestic regulation becomes
a barrier in itself.
How a telephone company is regulated in France affects
telephone companies that operate in the United States under a
wholly different set of rules. And the same holds for French
cases. When I was doing this back in the 1970's, we didn't
worry about how folks regulated service sectors. It wasn't an
issue.
Mr. Tauzin. Today it is.
Mr. Regan. Now it is. We have to look at the negotiations
as a process, not necessarily an end. We are not going to let
the best become the enemy of the good. We are going to continue
to try to do good. And, by doing that, we are going to identify
those areas of biggest conflict and we are going to try to
resolve them over time, and that is what we are going to try to
do with this round.
I believe this is going to be the ninth round since 1947,
and so it is important to realize that we are trying to
identify those areas of greatest conflict and begin to work on
those.
Now, what is fair and what is not fair. It is sort of like
your debates in telecommunications, you know, what is one man's
competition is another man's threat.
What is fair and isn't fair really depends, in my view, on
the adoption of standards of behavior that we are going to
agree with internationally as standards which are acceptable
for civil behavior, and we have them in the United States. We
have competition laws in the United States. And our competition
laws I think tend to be more well-defined, clearer for everyone
to understand and to seek relief under and become an
interesting model for the rest of the world to work off it.
Mr. Tauzin. Do we have to go to motive? Do we have to
examine whether or not a regulation for example, is there as a
protectionist regulation or whether it is there to serve as a
legitimate answer to consumers' concerns about the security of
a financial market, the safety of an insurance product, or the
importance of an environmental issue? How do you discover, in
these negotiations, whether a regulation is a legitimate
domestic interest concern that countries ought to be able to
possess and exercise for the good of their citizens as opposed
to a regulation truly designed to create protectionism and/or
serve as a barrier to entry?
Mr. Free. There is a building body of expertise around the
world as to what you need to regulate: securities, banking,
insurance, whatever.
Within the broad range of all of the options, there are
things that you can conclude such as there used to be applied
something called the economic needs test. This was the basis
for prudential regulation, particularly in Asia. It was based
on the assumption that the government would decide what the
public needed and so they would have a very strong control over
the introduction of products or the entrance of new markets.
It also found the Japanese approach, which was that
financial stability was guaranteed by size. So whereas we have
5,600 insurance companies in the United States, you would find
two dozen in Japan. We all know that some of the largest of the
Japanese insurance companies are the ones that have failed or
are failing. So size alone does not guarantee solvency or
stability. The Japanese approach again on product introduction
was it destabilized the market to have competition. Well, even
they have recognized that now.
So you can put boundaries through discussion of experts and
others about what is, quote, legitimate regulation and what is
not legitimate regulation. And, having said that, you can even
make some recognition for the need for a developing economy to
have more control over the regulatory system during transition
periods and far more developed economy.
Joe Papovich, in talking about this, used the term
``capacity building'' is going to be one of the focuses of the
Ministerial and the WTO agenda, and that is often meant in
terms of helping countries understand what the WTO means and
how they can comply with their requirements.
In regulatory reform, there is another side to it. We as an
industry around the world have spent lots of money and provide
lots of advice and certainly recognize that the regulators in
Indonesia or Korea or even Japan are not up to the level of our
regulators in terms of an open, competitive marketplace.
What we are looking at is, if we want in this next round to
get commitments from countries not quite able to completely
open their market and change their regulatory structure, they
ought to get help from the World Bank and the IMF. In fact,
they are getting some help from these institutions and some
others. You could link it and say, if you are willing to take
on this commitment in the WTO, put it in your schedule, as we
call it, sign on. That will be recognized by these two other
institutions that often do nothing with the WTO to get credit
for the funds that they need to raise their level of
supervision so they can safely and soundly do the things that
need to be done.
I think that is an area that Congress ought to talk a bit
more about when we talk about this next round.
And we use the term capacity building because when we had
the Asian financial crisis, at a meeting in Atlanta and others
that I have attended around the world assessing the cause of
the crisis, we determined it was not liberalization that caused
it. It was, in many cases, inadequate regulatory structures in
place. And the IMF and World Bank went in and provided funds to
help countries and asked commitments from them. But when we as
an industry said put those commitments in the financial
services agreement, the WTO said these are two separate things.
This is World Bank IMF, and this is the WTO.
Let's find a way to link it together positively to give
countries a reason to sign on. Most countries realize they have
to move toward liberalization. Services are an infrastructure.
When people look at the U.S. economy from around the world,
they keep saying to us, how do you get all of these new
businesses? And it is simply because we have a services
infrastructure that helps to incubate new businesses, whether
it is financial, whether it is consulting, whether it is
finding you an office space and telling you how to furnish it
or do your business abroad or whatever. So countries are
beginning to realize this, and we ought to be able to give them
some help in doing it.
Mr. Tauzin. Mr. Mohammad blamed everybody in a speech to
the World Bank following the Asian crisis. He blamed George
Soros. He blamed the Jewish conspiracy. He blamed the
international electronic herd for abandoning his country and
savaging his markets and depressing his currency.
Thomas Friedman, in a book of his, imagined a speech
Secretary Rubin might have given. Friedman was in the audience
that day, and he imagined a speech that Rubin might have given,
and it is an interesting couple of pages. Have any of you read
it?
Mr. Regan. Yes.
Mr. Tauzin. I recommend it to you.
Mr. Free, he basically makes these points: Quit trying to
blame somebody. The electronic herd is going to desert you when
you build buildings so you have the tallest building in the
world but it is half occupied, when you self-speculate in
currencies and when you yourself have not liberalized the way
you should have or failed to maintain regulated services the
way that you should have. And he concludes by saying that I
don't even keep a phone on my desk anymore because there is
nobody to call to blame anymore.
I live in fear of the electronic herd just like you because
they could savage the American currency and the economy
tomorrow if we unbalanced our budget, if we made some stupid
economic or fiscal decisions in this country.
Mr. Free. You asked about Malaysian insurance. There is a
connection to what you are saying now.
I actually had discussions with the prime minister and with
his finance minister on insurance in particular, where they are
extraordinarily restrictive, trying to force selldown of local
companies, keeping the market highly restrictive. They have
created a high-tech economy that needs high-tech risk
management. High-tech risk management requires technical
capacity and financial capacity if you are going to insure it.
They have a huge outflow on what we call reinsurance.
Reinsurance plays a natural place in the economic picture, but
theirs is highly distorted because they have pushed offshore
the expertise and the capital that they need to accomplish
their own economic objectives. And yet we cannot get them to
move off the dime on this issue even though they would be the
ones to whom the benefit would redound.
Mr. Tauzin. I invite you all to help me. Let's take hedge
funds. Obviously, there is some interest in Washington about
hedge funds all of a sudden. Are they properly regulated? Do
they need to be regulated? Do they require some reporting, some
minimal disclosures?
So we have an issue that may develop here in Washington in
reference to hedge funds. Hedge funds are important all over
the world, and they are part and parcel of George Soros'
operations. Where and when is it proper for us to see a problem
and to exercise some domestic jurisdiction over that problem in
a world of electronic commerce and international financial
transactions and investments where the decisions we make may
operate to settle somebody's concerns here in America, but also
affect people outside of this country in a community defined by
electronic commerce and global financial investment. How does
that play? Give me some thoughts on it?
You are on, Mr. Brickell.
Mr. Brickell. Are you asking us whether hedge funds should
be regulated or not in this country? Or are you asking whether
we should make the pace of our reduction in trade barriers here
contingent on the policies that other countries adopt for
themselves?
Mr. Tauzin. I use hedge funds as an example because it is
an area that we are not regulating yet. We may be faced at the
SEC or Congress to begin a regulatory policy. I am not taking a
position, and I don't know if there is a problem yet. But I am
beginning to hear the rumbles about engaging that issue at some
point.
When is it appropriate for nations to regulate in
electronic commerce and international trade where hedge funds
become important financial packages? When is it appropriate for
us to regulate one way and some other country legitimately
regulate differently? It is part and parcel of this whole
question of what are the appropriate regulatory structures that
each country imposes that are truly legitimate, not barriers
and nontariff barriers to trade.
Mr. Brickell. Two quick comments about it.
First of all, I work for a regulated financial institution.
J.P. Morgan is regulated. Hedge funds are not regulated and, to
some extent, they compete with us for funds to manage.
As a regulated financial institution, let me say I am glad
that they are not regulated. I think they perform a useful
social function, and it is useful internationally. They bring
more market discipline to bear on the economic policies of
countries that are making economic mistakes and on the
countries that are introducing successful policies.
For every Southeast Asian country that laments the fact
that the electronic herd has deserted it because its policies
are not attractive, there is an Italy where improvements in
policy have resulted in attractive investment opportunities
which bring the hedge funds in as investors. That makes stock
prices rally, it brings interest rates down, and it lets
Italian workers borrow money to buy homes at lower rates than
they could before.
We don't hear enough about the good results that come from
that kind of market discipline, but it helps the man on the
street who has some other force exerting useful pressure on his
government to adopt desirable economic policy. So that is what
I say about hedge funds.
Now, is it good to have folks in government deciding which
policies of other countries are useful regulations and which
ones are hidden barriers to trade? I guess it is all right to
have our folks thinking about that and pushing hard to reduce
the trade barriers of other countries as much as they can. But
we have got to remember that our own trade barriers, our own
tariffs and quotas hurt us. And if we make our reduction in
those trade barriers, our own trade barriers, contingent upon
changes in other countries, we are going to in all likelihood
slow the pace of improvement in our economy. So I would say----
Mr. Tauzin. You say lead by example?
Mr. Brickell. Lead by example, and it will help us most of
all.
Mr. Tauzin. So resist the temptation to unnecessarily
regulate if to do so would be an invitation to other countries
not only to not take their barriers down but perhaps even
enlarge them. Is that your advice?
Mr. Brickell. Let me add one thing. Don't use the engine of
trade policy or try to have the engine of trade policy haul
every other international and social issue over the mountain.
Let's get that trade policy improvement as fast as we can.
Mr. Tauzin. Mr. Regan.
Mr. Regan. I would like to get back to your core question,
which is what is legitimate.
Mr. Tauzin. Yes.
Mr. Regan. That is the question. And what is legitimate in
Japan and what is legitimate here is very, very, very
different.
What we need to do is we need to have an ability here to be
able to bring out where those differences begin to cause
friction in creating an inability for us to be able to do
commerce with those countries and try to resolve those
problems. And, over time, ultimately what is going to happen if
the process continues to work as it has over the past 30 years,
we will begin to identify standards for behavior which are
common.
For example, in telecommunications, the referenced document
takes the experience of the United States with competition,
with interconnection, with deregulation, and extends that to
the world with the adoption of four basic principles. Now that
didn't seem like much at the time, but it has begun to move
people in the direction toward adopting a model which, frankly,
has worked very well. The rest of the world looks at us, gee
whiz, how did you do it?
We have come up with a model that others are beginning to
follow, but it is not going to happen overnight. It is going to
be gradual. And in this round we will take the next step. We
will take those four principles and we will begin to flesh them
out a little bit as to actually how they would apply in
situations when, for example, an ISP wants to gain connection
to a telephone switch to provide service to a consumer.
We will say, in our view, that it is an enhanced service.
It doesn't carry access fees, et cetera. And hopefully the rest
of the world will follow our example, as they have with the
basic question of whether long distance networks ought to be
able to gain nondiscriminatory interconnections to local
telephone systems. That is common around the world today. It
wasn't 15 years ago.
I guess the answer to your question is there is always
going to be a difference as to what is legitimate. We need to
identify those differences and then establish common standards
for behavior and then improve those standards over time,
realizing that there will always be friction.
Mr. Tauzin. Mr. Regan, you were the most upfront in
acknowledging the incredible nontrade barrier that value-added
taxes, border-adjustable taxes are now playing on the GATT.
Mr. Regan. Sure.
Mr. Tauzin. I want to thank you for that. You helped make
the point that I was trying to make.
Do you other two have a disagreement with that? Services
obviously have been treated differently, as you pointed out,
Mr. Free, for a long time, and it is still evolving as an issue
in trade. But let me see if I can make the point a different
way.
We went until 1913 in this country without income taxes
except for a brief period during the war of aggression against
the southern States when Lincoln imposed a small income tax
that he later repealed when the war was over.
When this country in 1913 adopted an income tax, we were a
country that depended on tariffs, custom duties--the Coast
Guard was our tax collector for most of our years. Tariffs or
customs duties were the principal source of income, together
with some excise taxes on domestic products. We went from a
country that depended on external taxes to one that had a mixed
dependency on internal and external taxes, income taxes and
tariffs.
And now we are entering a new phase where the country is
almost totally dependent on internal taxes because we are
dropping our tariffs income, our tariff barriers to trade but
also tariff income simultaneously.
The concern expressed earlier is that we are becoming a
Nation dependent strictly on internal taxes, and those internal
taxes are not boundary related, they have nothing to do with
whether the goods are imported or exported, they are taxed on
all production in America, there are taxes on the workers and
taxes on the businesses which are paid again by the consumers
as part of the cost of the products. As we enter this new
global economy and the country no longer is dependent on tariff
income, we are now faced with a situation where every
competitor, whether it is in a real book or an electronic book
service, will have a natural advantage over us if they have a
border-adjustable tax.
And if it is electronic books, insurance products, or
financial services that are heavily taxed in America, on an
income tax system that adds to the cost of those products
overseas, or whether it is a piece of Corning glass that is
made here and faces a value-added tax when it arrives at a
country of destination, we are going to continue to have
inequities that are going to drive manufacturing offshore.
I ask a simple question in a lot of debates that we have on
that issue. Why would someone want to locate in America and
sell products in America that are going to carry this heavy
load of income tax structure on its back when you can
manufacture offshore and ship them into America value-added,
tax free? And particularly if you can get cheaper labor and
more liberal environmental regulations or litigation rules that
lower the cost even further. Aren't we building a trap for
ourselves if we continue down this path? Mr. Regan?
Mr. Regan. First of all, I think that the trade deficit
sort of speaks to the issue that you just pointed out. The fact
of the matter is that trade deficits are supposed to move with
changes in exchange rates, but ours has been around for 30
years, 3 decades. One of the reasons that it has been around
for 3 decades are because of structural imbalances like you
just described.
I can attest to the fact that for us today, you know, it is
the barrier that we face everywhere in the world, and it
inhibits our ability to be able to compete in a very
significant way.
Mr. Tauzin. Mr. Free.
Mr. Free. I will have to give you, Mr. Chairman, a more
personal view. Logically what you are saying is right; and as
we begin to use electronic commerce, it is going to come right
to the head. Insurance is an example. Products and services,
software--software can be called a product if it is delivered
in a box. My son is in an Internet startup firm. His firm
delivers its software without ever putting it in a package. It
is considered a service. What is going to happen to it when it
is sent outside of the United States?
Mr. Tauzin. Cisco Systems now does 87 percent of their
business over the Internet. They deliver their products and
services over the Internet.
Mr. Free. Like Tim, I had a fairly long government career
before I went into the private sector. And one of my first jobs
was to work with the Treasury Department in drafting the
domestic international sales provisions of the Tax Code which
was an attempt to deal with this anomaly in the GATT where we
can't rebate our taxes, but sales taxes, direct taxes can be
rebated. Of course, ultimately, DISK was found to--and that
would have cut--if you used it right, it would cut your taxes
on your export products by 25 percent.
So then we ended up with this convoluted thing called FISK.
In 1 year I put on 115 seminars around the United States in
every place you can imagine trying to explain to lawyers and
accountants, much less businessmen, how we can offset this
difference in our tax systems. At that point, I was in the
Commerce Department. We even looked at using the value added
tax. Richard Linholm at Oregon State University did a study on
what the impact would be.
So, again, speaking personally and based on my own previous
experience and having gone through DISK and FISK, our system is
out of whack with the rest of the world. Europe did not go to a
VAT for protectionist reasons. It was part of developing the
European Economic Community. Before it was even thought of as
being a union, there was a decision to go the sales tax route.
That is the cleanest way to do it. And, as you say, you add the
Internet in here and increasing cross-border transactions and
services if we get more liberalization, and we are going to
have the same problem because we will be paying our domestic
taxes and our VAT as those services are delivered.
You will see in my paper that we have our own problem with
subpart F. That is well described. It is in the extenders bill
that hits financial companies particularly badly. But I agree
with you.
Mr. Tauzin. Here are the numbers that came out of the
Harvard School of Economics. If you want to read an interesting
paper, it is by the Dean of the Law School.
Mr. Regan. Law school or economics?
Mr. Tauzin. Economics.
The paper is contained in a book entitled Rising Tides by
Jerry Jasinowski, the President of the National Association of
Manufacturers. He has a chapter on consumer taxes by the Dean
at Harvard Economics School.
Here are the numbers. He predicts if we got rid of the
income tax and went to a border adjustable consumption tax,
like a retail sales tax, just automatically border adjustable,
no taxes on products going out, taxes on products purchased
from overseas and consumed here, his numbers are that we would
reduce the cost of production 25 percent for all products and
services in this country on average; that exports would jump up
29 percent sustained every year; and that there would be an
investment shift of 80 percent back to America, as opposed to
investments leaving the country.
An 80 percent shift back to this country. Those are
enormous numbers. It doesn't take an economist to look at those
and understand that you would wipe out the trade deficit. We
would probably have trade surpluses, and we could continue
politically on the path of free trade because we would be
restoring jobs back to the labor markets here in America, and
we would be halting the tide of manufacturing export, that is
manufacturing companies reinvesting elsewhere. That is worth
thinking about.
Mr. Regan. There is nothing that anybody is talking about
in the Uruguay Round that could have these kinds of effects.
Mr. Tauzin. There is nothing in these trade negotiations
that we could get in the form of concessions that could have
these kinds of numbers.
And I guess what I am asking all of you to do, as I asked
Joe to do this morning, is to focus on it and think about it in
the councils and in the alliances that you represent and of
which you are a part. Because if we don't soon have a
recognition in this country that we are out of kilter with the
rest of the world we are penalizing every worker and business
in the country as we go to more and more extensive globalized
trade. If we don't focus enough on it in the near-term future,
it will get away from us and be too difficult to turn it back.
Mr. Free. We used to go through exercises in export
disincentives, and taxation was always up there, always up
there.
Mr. Regan. Let me suggest a way that this might be brought
to the fore.
One possibility would be for the Congress to--the Congress
does have the constitutional authority to regulate
international trade. It does not lie with the President, as you
well know.
One possibility would be for the Congress to--or for you to
introduce a bill, and certainly Corning would be glad to help
you, which gives the U.S. negotiators direction to deal with
this balance in the context of these negotiations, and the
failure to do so would result in some sort of an automatic
procedure which would put Congress on the road toward dealing
with it domestically.
And I know there are lots of debates about this issue. Over
the years I have followed them closely. I know that it is a
sticky one, but that kind of leverage, that kind of a
notification for the rest of the world of how serious the
Congress feels about this would raise this issue to the top of
the agenda.
Mr. Tauzin. Let me not leave before we touch on one other
final thing.
You touched on it all in your discussions, and I want to
try to maybe amplify it a bit, because it is a domestic problem
as well as an international one. And the way in which you and
those who help influence some of these trade negotiations are
going to settle it may give us some guidance as to how we
settle it domestically, because they are begging for settlement
real soon.
And that is, in e-commerce, what are the rules about what
laws apply when a doctor in Louisiana treats a patient in the
Gulf of Mexico on a rig that happens to be in Texas waters? Has
he violated the laws in Texas against practicing without a
license in Texas?
It is a domestic version of what you have pointed to in
terms of insurance problems. Because you can't sell an
insurance product to a French citizen, for example. Where is
the point of sale? What laws govern at what point in electronic
commerce that occurs around the globe? Not just taxes, but what
regulatory and licensing laws apply and what effect then do
those decisions have on the fairness and freeness of trade?
Perhaps you can touch on that a bit for me, because we are
going to have to deal with that in the next several years
thinking and talking about that in terms of contract law, and
if we can't get Uniform Commercial Code agreements on that, how
do they apply?
Another good example, you know, a doctor in Louisiana on
the Internet assists in an operation in California, and it goes
badly, what medical malpractice law applies? Louisiana has a
limit on damages. California may not. Do the limits protect the
doctor in Louisiana? I don't know. Nobody knows.
And in international law we are going to pump into this
problem. It is part of WTO and GATT arrangements. They are
going to apply in terms of financial services, they are going
to apply in terms of fiberoptic sales and liability laws,
insurance laws.
I don't know that our negotiators are yet focused on all of
those adequately, and can you give me some insight as to
whether you are helping to focus them or are they keen on these
notions? Do they need to be settled at some point and how fast
are they going to be inhibitors to electronic commerce on a
global scale?
Mr. Regan. Well, I appreciate your concern about this,
because it concerns us in a very fundamental way. The extent to
which actions are taken which inhibit the use of the net, that
will have all kinds of effects, worries us. But let me take a
stab at your question.
I think the message is getting through. I think,
unfortunately, Joe--it is not in his portfolio, so it was hard
for Joe to answer your questions. But the folks in the high-
tech community have pressed hard to establish a clear agenda
for e-commerce. We are members of at least three groups that
have made a message clear, and the message has been as follows:
No. 1, the moratorium that you currently have that was
agreed to back in March, 1998, needs to be extended at least
through this round so we can begin to sort this out.
No. 2--and these are not legal commitments, they are
agreements in principle.
No. 2, the ministers need to agree that, to the extent they
feel compelled to take regulatory action that will effect e-
commerce, that they need to agree that those actions will be
limited to those which do not have trade distorting effects.
No. 3, we need to set up a process in which we can start to
sort out all these issues, and we call this the International
Framework for Electronic Commerce, and that framework would
involve an effort to begin to identify each one of these issues
and sort out how we are going to address them up front.
Mr. Tauzin. Anybody doing that now?
Mr. Regan. No one is doing it now. They are supposed to
agree at the Seattle Ministerial to establishing this
framework.
Mr. Tauzin. Okay.
Mr. Free. The issues are the same for us, and we are in the
same organizations that are pushing this framework. My guess is
it won't move quickly enough to deal with the real problems
that will come up. Those issues will have to be resolved in
different ways in different places, in our court system here to
some extent and in the court systems of other countries and
maybe by negotiation.
The example that you gave of the doctor, think again of the
MRI data that is sent real time to India to be analyzed by an
Indian doctor who might have ended up in a U.S. institution but
now India has a high-tech sector. They are not just
manipulating this digital data, they are making a medical
judgment about what it means and sending that back real time to
a U.S. doctor. If something goes wrong, who is responsible? Who
do you sue and where? Certainly we will sue in the U.S., but
where is this Indian doctor or his institution going to fit in?
On insurance or financial services, it is all of the
questions. Where does the transaction take place? What law will
have jurisdiction over it? You can go on and on. I don't see
our supervisory authorities moving quickly enough.
And at this World Services Congress actually someone from
Australia pointed out that there are two trends. One is called
globalization. She introduced the idea of internationalization.
By that she meant our own regulators don't think beyond their
own regulated territory. Yes, they worry about foreign
financial institutions' activities that affect their operations
domestically, but they don't think in terms of what you have to
do to create an international framework to deal with regulatory
issues that need to be dealt with.
One of the reasons we have almost no cross-border
agreements in the NAFTA on services, and particularly financial
services, the U.S. didn't want it, Mexico didn't want it, is do
you want somebody in Louisiana buying a policy from a Mexican
insurance company that we have no idea if it is solvent or not?
So you have to agree on a certain body of standards. At
some level it remains local, but there is mutual recognition,
and that is what Europe has done with its single integrated
market and financial services. You get a license in France, you
need just one license to operate anywhere in the European
Union, but it is based on the concept that everyone in the
Union has a certain minimal level of regulatory supervision
that is mutually recognized.
There are a lot of other areas and regulations that they
have not agreed on yet. That is what you are going to end up
needing, at least in our area, to have a regulatory framework.
Mr. Tauzin. And we will all have our olive trees. We have
our Buy America programs, too. We always bump into those.
Mr. Brickell. We appreciate your holding this hearing and
looking after the work of the administration as they go into
this round. We are optimistic that there will be good results,
and we thank you for it.
Mr. Free. Again in the services area and financial services
area in particular, the role of the Congress in helping us
achieve our objectives has been critical. We look forward to
working with you. As was pointed out earlier, Seattle is just
the first step. And if we get this done in 3 years, I think we
will all be pleased. But we will need help along the way.
Mr. Tauzin. Thank you very much. The hearing stands
adjourned.
[Whereupon, at 4:25 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Eric Koenig, Senior Federal Government Affairs
Manager and Senior Corporate Attorney, Microsoft Corporation
Thank you, Mr. Chairman, for giving me the opportunity, on behalf
of Microsoft Corporation and the member companies of the Business
Software Alliance (BSA), to present our views on the opportunities the
upcoming World Trade Organization Ministerial and New Round of WTO
negotiations present for expanding electronic commerce.
The World Trade Organization (WTO) will convene this Ministerial in
late November, in Seattle, bringing together Trade Ministers from
around the world. As an official co-chair of the Seattle Host Committee
of the WTO Ministerial, along with Boeing Corporation, Microsoft is
excited about the opportunity to contribute to the work of the WTO and
the Seattle Round of negotiations. Microsoft and the member companies
of the BSA believe that the upcoming Ministerial provides important
opportunities to help ensure that electronic commerce continues to
contribute to dynamic markets and worldwide economic growth.
Since 1988, the BSA has been the voice of the world's leading
software developers before governments and with consumers in the
international marketplace. Our members represent the fastest growing
industry in the world. BSA educates computer users on software
copyrights; advocates public policy that fosters innovation and expands
trade opportunities; and fights software piracy. BSA worldwide members
include Adobe Systems Incorporated, Apple Computer Corporation,
Attachmate Corporation, Autodesk, Inc., Bentley Systems, Inc., Corel
Corporation, Lotus Development Corp., Macromedia Inc., Microsoft Corp.,
Network Associates Inc., Novell, Inc., Symantec Corporation and Visio
Corporation. Additional members of BSA's Policy Council include Apple
Computer, Inc., Compaq Computer Corporation, IBM, Intel Corporation,
Intuit Inc., and Sybase. BSA can be found on the worldwide web at
www.bsa.org and www.nopiracy.com. Mr. Chairman, for the record, I would
like to submit a report released by the BSA CEOs on e-commerce. (See
attached).
The software industry depends on trade. More than 50 percent of the
revenues of BSA member companies, and of Microsoft, are generated by
overseas sales. With the establishment of on-line electronic commerce,
we expect that even more of these sales will be to foreign customers.
We are very grateful that you and your colleagues are holding this
hearing to highlight the tremendous potential that exists to expand
trade through electronic commerce, especially as the rules for
electronic commerce become more liberalized and harmonized.
It is critical that countries around the globe work together now to
develop a workable framework for e-commerce. A framework that promotes
e-commerce holds great benefit for businesses and consumers. Consumers
benefit from e-commerce in many different ways--most obviously, broader
choice and easier access to goods and services. According to a recent
survey of Chief Financial Officers, the proportion of US companies that
sell products over the Internet will jump from 24 percent in 1998 to 56
percent by 2000. Consumer choice expands every time a new retailer goes
online--provided regulatory or other barriers do not inhibit trade.
Likewise, e-commerce is creating tremendous opportunities for
businesses. Worldwide revenue from electronic commerce is expected to
increase as much as $500 billion by 2002, accounting for 9.4 percent of
total sales revenue worldwide. Revenue from e-commerce in Europe was in
the range of one billion dollars in 1997, and is expected to grow to as
much as $88 billion by 2001. These estimates may turn out to be
conservative. Forrester Research has suggested that business-to-
business electronic commerce alone could reach $1.3 trillion by 2003.
The software industry has been a consistent advocate of
international trade liberalization. The Uruguay Round results have made
a meaningful and lasting contribution to our ability to compete in the
international marketplace. For example, when the Uruguay Round of
negotiations was launched in 1986, most countries did not provide
explicit legal protection for computer programs under their national
laws. Piracy of software was rampant. The Trade-Related Intellectual
Property Rights (TRIPs) Agreement, however, has brought about
significant improvements. Today, most countries provide substantial and
meaningful legal protection of software.
Although today we are better able, unlike in the 1980s, to bring
legal action against those who steal our products, the rise of Internet
piracy is an ominous and potentially industry crippling phenomenon that
must be addressed on a national and international basis. Despite an
improved legal environment, piracy rates worldwide remain
astronomically high. Mr. Chairman, worldwide the software piracy rate
is 38% costing close to $11 billion. The rate in the US is 26%; Western
Europe: 36%; Eastern Europe: 76%; Asia-Pacific: 49%; Latin America: 62%
and the Middle East and Africa: 63%. Since the US software industry is
principally headquartered in the United States, this means lost US jobs
and tax revenues. It also has a serious impact on the world economy and
countries attempting to take advantage of the high tech revolution.
With the growth of the Internet, we see an unfortunate and
substantial growth in electronic commerce piracy. Multilateral
agreements that provide strong and effective protection online are
critical to the continued expansion of e-commerce and the health of the
software industry.
As we look forward, three aspects of international policy stand out
as having substantial implications for the software and computer
industry. I would like to say a few words first about the TRIPs
agreement and tariff liberalization.
As I stated earlier, the establishment of the TRIPs Agreement was a
watershed event in the development of the global software industry.
TRIPs provides us with a solid framework upon which to build, promote,
and defend copyrighted works against theft, including computer
software. Of course, there are areas where TRIPs could be strengthened
and improved, particularly with regard to the Agreement's obligations
on enforcement of rights, and perhaps also in the area of domain names.
We would certainly welcome such improvements, but we do not
advocate specific negotiations at this time. We recognize that the
TRIPs Agreement will be subject to review in 2002 and we urge all WTO
members to press ahead with full implementation of TRIPs. Moreover, in
the context of the 2002 TRIPs review, WTO Members may need to consider
new provisions that will better adapt TRIPs to the digital environment.
Perhaps the most significant recent international development in
the area of intellectual property is the conclusion of the World
Intellectual Property Organization's (WIPO) Copyright Treaty and
Performances and Phonograms Treaty. Your Subcommittee passed the
Digital Millennium Copyright Act last year, implementing these Treaties
here in the U.S. These Treaties make substantial improvements in the
legal rights afforded to software developers, especially in terms of
improving their ability to attack on-line piracy. The United States
implemented the Treaties last year through the enactment of the Digital
Millennium Copyright Act, and the European Union has declared that, at
the appropriate time, the results of the WIPO Treaties should be
incorporated in TRIPs. We support this and believe that WTO Ministers
should declare that national implementation of these Treaties is an
urgent matter, with a substantial trade promoting impact.
Turning now to broader electronic commerce issues, we believe that
the most promising international commercial development since the
conclusion of the Uruguay Round has been the emergence of network-based
(Internet) trade. Today, BSA member companies sell software and other
products on-line. These transactions benefit both consumers and
software developers because they are faster and cheaper than
traditional, over-the-counter retail sales. We expect these sales to
more than double annually for the foreseeable future.
Thus, we believe that a key priority for trade negotiations should
be to ensure that impediments to e-commerce are not put in place, and
that existing impediments are reduced or eliminated. We recognize that
this goal may not be amenable to a single set of undertakings. Because
the Internet continues to evolve as a business, the trade aspects of
the Internet are not now fully apparent.
But we do believe that Ministers can make a good start.
An excellent fist step was taken in May 20, 1998, when the WTO[s
Ministers agreed that WTO ``. . . Members will continue their current
practice of not imposing customs duties on electronic transmissions.''
This commitment is not now permanent, and it applies only to electronic
transmissions. We would support making permanent this commitment, as
well as clarifying that it applies regardless of the form of
transmission (wired or wireless) and that it applies both to the
transmission and to its contents.
In addition, the work over the past year by the TRIPs, GATS and
GATT Councils on e-commerce constitutes an excellent foundation for the
work program that should follow. It is our understanding that each
Council has determined that the current WTO obligations apply to
transactions conducted over networks. They have also concluded that
certain areas of these Agreements need to be updated to more accurately
reflect the nature of e-commerce. We agree with their conclusions that
e-commerce constitutes an evolutionary step in trade regimes and does
not require wholesale changes to existing obligations. Recognizing,
however, that a single e-commerce transaction may implicate rules
applicable to services, goods and intellectual property, we believe
that a horizontal approach in the future work program of the WTO may be
best--that is, work in each of the Councils at the direction of the
General Council, while giving the General Council the discretion to
establish additional work programs on issues which affect trade in
goods, services and intellectual property.
Forbearance of government action is the watchword for Seattle. We
believe that the WTO Ministerial provides an opportunity that must not
be missed to set the right parameters for future WTO work. Key among
these, we believe, is a commitment by Ministers to refrain from
enacting measures that could have an actual or potential trade
distortive effect on e-commerce. Such a commitment would underscore
that the goal of the future work program is to seize and ensure the
possibilities of e-commerce by keeping it barrier-free. Recognizing
that, in some rare instances, domestic imperatives may necessitate the
enactment of measures that could have a negative effect on e-commerce,
Ministers should further declare that they would seek to adopt only
those measures that have the least trade restrictive effect.
There is one area where we believe that improvement would go a long
way to increasing the WTO's effectiveness and international standing.
WTO could dramatically increase public trust by becoming more open,
more transparent. WTO should seek to find ways to allow greater public
scrutiny and to permit non-governmental organizations to express better
their views in WTO dispute resolution and other processes. Such changes
would help WTO reach its goals of trade liberalization worldwide.
Finally, there is one aspect of the current WTO debate that is
troublesome for the software industry. We are concerned that much of
the discussion in Geneva has focused on whether e-commerce should be
classified as simply a service, or whether it implicates goods as well
as TRIPs obligations under the WTO. It is our view, as noted above,
that e-commerce is much more than just a set of services.
If e-commerce is treated as just a service, it could have serious
implications for the software industry. Such an approach would have
immediate and negative implications for software companies as well as
other industries. Ninety-four percent of the world's exports in
software is US sourced--reclassifying software as a service could alter
the tax regime for these products and dramatically impact the sales of
one of the US's most competitive exports. Currently, it is our
understanding that the European Union takes the position that a
computer program fixed on a disk ordered on-line and delivered in
physical form (e.g., by postal service) is subject to WTO obligations
as a ``good'' under the GATT. By sharp contrast, it is also our
understanding that they believe that the very same software program
ordered on-line and delivered on-line, should be classified as an
``electronic delivery'' subject only to the GATS obligations on trade
in services.
The trade implications of such a view are potentially very serious.
Software as such, other than repair and maintenance of software, does
not seem to be explicitly covered under software services and is not
now subject to GATS. Thus, the reclassification of software from a good
to a service could deny software basic market access and national
treatment benefits. Perhaps more importantly, in most countries,
subject to a 1984 WTO/GATT understanding, duty on software is now
assessed on the basis of the carrier medium (e.g., the value of the
diskette), and not the value of its content (the intellectual property
contained in the medium). The issue of reclassification could open the
door to applying duties on the value of the software itself, rather
than its physical medium. The consequences for traded software would be
horrendous, as they would make the value of the product subject to a
duty, in stark contrast to the situation in many (if not most)
countries today. In addition, such reclassification would deprive trade
in software of its current unqualified MFN and national treatment
benefits.
In essence, we believe that to treat e-commerce as merely a service
would be to ignore the true nature of this form of trade. In addition,
it could have a serious and immediate negative impact on the sale of
computer programs by means of the Internet.
Mr. Chairman, the WTO Seattle Ministerial and the subsequent New
Round of negotiations offer not only the US and European economies, but
indeed the global economy, tremendous opportunities as we head into the
new millennium. The unparalleled growth of electronic commerce means
economic possibilities that we could not even imagine just a few years
ago. Your Subcommittee and the Committee on Commerce have an extremely
important role to play in seizing these opportunities and making them a
reality. The Business Software Alliance stands ready to assist you in
this critical endeavor.
We thank you again for this important hearing and for the
opportunity to present our views.