Testimony

• Mr. Leo Hindery, Jr.

  Managing Director

  InterMedia Partners
  Read statement

  Testimony

  Mr. Leo Hindery, Jr.

  “Are Free Trade Policies Working?”

        Senate Commerce Subcommittee on Interstate Commerce, and Tourism

  April 18, 2007

     Testimony of Leo Hindery, Jr.

   

   

  I am Leo Hindery, Managing Director of InterMedia Partners.  I have previously served as the CEO of TCI and AT&T Broadband. Recently, I chaired The Horizon Project, a group of eleven CEOs and policy specialists that produced a report to Congress on what we believe needs to be done to protect America’s prosperity in this era of globalization.

   

  Thank you, Mr. Chairman and Senators, for convening this important hearing on current U.S. trade policies.  My own concerns about these policies manifest themselves in the nation’s record – and still growing – trade deficit, in the disappearance of valuable chunks of our economy due to the callous offshoring of millions of American jobs with many millions more certain to follow, and in the adverse national security implications of certain of our trade practices.

   

  The United States is now the only major net consumer in the global economy, with a current account deficit in 2006 of $857 billon, which is a staggering 6.5% of GDP.  And this huge deficit does not include the estimated $200 billion of taxable foreign subsidiary earnings being masked each year by misallocations and obfuscating accounting.

   

  More than five million American jobs have been lost to offshoring in just the past six years: three million manufacturing, and two million service and IT-related.  Looking ahead, more than 14 million of the roughly 141 million civilian non-self employed jobs in America today will be off shored over the next 10 years, including 7.0 million more manufacturing jobs, 3.3 million more service jobs and 3.4 million more IT jobs.  And these are very conservative estimates according to Alan Blinder, vice chairman of the Federal Reserve during the Clinton administration.

   

  And in the process of exporting high-tech manufacturing jobs, the U.S. is also indirectly exporting important aspects of its national security.  The United States has a $50 billion annual trade deficit with China alone for “Advanced Technology Products”, and from a U.S. national security perspective DRAM, SRAM and ROM chip manufacturing is now grossly over-reliant on China, Taiwan and South Korea.  Many of these items are essential to our high-tech weaponry and national defense.

   

  For free trade to be fair trade, Senators, it must be rules-based, and these rules must be followed.  But right now many major U.S. trading partners are breaking the rules through massive currency, tax and capital subsidies and through unfair labor and environmental practices.

   

   

   

  For each of the past 22 years, pursuant to the Trade Act of 1974, the Office of the U.S. Trade Representative has submitted an annual report to Congress surveying significant trade barriers to U.S. exports.  According to the USTR, there are ten categories of trade barriers ranging from tariffs to bribery.

   

  But nowhere in this survey of foreign barriers to U.S. exports, Senators, is there any serious treatment of non-ILO labor practices, of non-existent or de minimis environmental standards, or, especially, of subsidies and currency manipulation.

   

  If the USTR’S report in 2007, which is called the NTE, is overlooking the most adverse trade barriers, then it should come as no surprise that we as a nation are getting absolutely killed in our trading with China, India and Japan.

   

  Two cases in point:

   

  The Semiconductor Industry Association has recently calculated that the combined tax and capital subsidization of China’s high-tech industries is now so extreme that only about 10% of the overall cost difference vis-à-vis American manufacturers is labor cost-based and that 90% is tax and capital grants-based.

   

  In turn, despite Treasury Secretary Paulson’s contention on February 10 that “the Japanese yen’s value is set…based on underlying fundamentals”, Senators Levin and Stabenow and Congressmen Dingell and Levin have concluded that in fact the Japanese government is artificially depressing the yen to such a degree that Japanese automakers are realizing an effective subsidy of roughly $8,000 per car. 

   

  To personalize further how foreign subsidies and illegal trade practices are crushing American workers, I would like to briefly discuss Intel and Citigroup, each of which is a leader in its respective field.

   

  Intel’s announcement on February 12 of its new programmable teraflop superchip was rightly hailed as a success for American innovation. But this euphoria turned into just more pink slips for American high-tech manufacturing workers when a month and a day later, on March 13, Intel announced that it will now build in China a massive $2.5 billion chip fabrication shop, propped up by an announced $1 billion subsidy from the Chinese government and by many other subsidies that Intel and China did not want to announce.

  And then there is Citigroup, which confirmed last week that at the same time it is eliminating 7,000 American jobs, it is, even more notably in my opinion, offshoring an additional 9,500 American jobs primarily to India, where it already has 22,000 employees working in highly skilled areas like research, investment banking and credit analysis.  The bank announced these relocations and cuts with absolutely no expressed remorse for the American workers affected, and it certainly did not discuss the extensive subsidies it is receiving from the Indian government as inducements for offshoring another 10,000 jobs.

  Greatly informing all of my comments today is the reality that the U.S. goods trade deficit with China alone is now a staggering $232.5 billion.  In 2006 we exported $55.2 billion of goods to the Chinese, but they in turn exported $287.8 billion of goods to us.  This ongoing imbalance in trade with China has left that country with foreign exchange reserves of an unprecedented $1.2 trillion, up 37% just since this time last year.  China is now, by far, the largest source of funding for U.S. government deficits.

   

  As I have commented, China’s real trade advantage results not from its criminally low wages, but from tax breaks and from subsidies, including currency manipulation, grants and low-cost loans given to companies that have no intention and sometimes not even an obligation to pay them back.  And to these benefits China adds tariffs, standards abuses, intellectual property thefts, policies favoring domestic production, and market access conditioned on local production or intellectual property transfers.

   

  In recent days, the Executive Branch has, finally, begun to wake up to some of the specific trade problems with China and to initiate some long overdue responses.  But as we go forward, the Adminsitration, working closely with Congress, must take additional steps to ensure that our trade agreements with all countries are fair and vigorously enforced, that high value-added jobs in the U.S. grow, and that there continue to be substantial investments in worker skills.

   

  To these ends, I recommend that this Subcommittee consider four actions:

   

  1)  Take actions against illegal and unfair trade practices.

  Congress should require that the annual NTE survey by the USTR include, as defined trade barriers to U.S. exports: subsidies; currency manipulation; non-ILO labor practices; and weak or non-existent environmental standards.  In turn, the USTR should be specifically charged with prosecuting all meaningful illegal violations, and, expanding on a proposal already made by Senator Stabenow, any U.S. company should be permitted to petition for tariffs on imports from countries that materially benefit from such subsidies, keep their currencies depressed, or do not have ILO labor and minimum environmental standards.  Finally, there should be no renewal by Congress of fast-track Trade Promotion Authority, or TPA, without requiring that all future trade agreements approved under TPA incorporate such labor and environmental standards.

   

  2)  Strengthen trade agreements enforcement. 

  Trade agreements are only as good as the resources brought to bear to enforce them, but in the last six years the U.S. has filed an average of only three WTO cases a year, versus an average of eleven per year during the Clinton administration.  In response, Congress should transfer responsibility for evaluating and prosecuting trade agreements violations from the office of the USTR to a new Division at Justice headed by an Assistant Attorney General for Trade Enforcement.  Congress should also insist on “parity of enforcement” among all trade agreement requirements, whether commercial or otherwise.

   

   

  3)  Cap on the nation’s trade deficit.

  As already proposed by Senators Clinton and Dorgan, Congress should enact limits, expressed as percents of GDP, on both the yearly trade deficit and the accumulated trade debt.  When any such limit is exceeded, the Executive Branch must then immediately initiate actions to bring the deficit back in line. 

   

  4)  National security protection legislation.

  To stop the export of important aspects of our national security, Congress should enact legislation requiring that manufacturing activities which have national security implications and are proposed to be off shored be subject first to a “national security impact statement”.

   

  In addition to these four trade-related recommendations which are under the purview of this Subcommittee, I recommend that the Senate Finance Committee consider, in a revenue neutral fashion, correlating the corporate tax rate on the profits of the nation’s larger manufacturing and technology services companies with the average value-added of their U.S. employees. The corporate tax rate for these companies would be reduced on a sliding scale based on their value-added standing relative to the median of the particular business sector in which they operate. 

   

  Since most of the value that such a corporation adds to its products and services reflects the wages and benefits it pays its employees, this corporate income tax change would be a significant financial incentive for a corporation to boost its average wage to non-executive employees through productivity gains and by investing in worker skills and capital equipment. 

   

  As a final recommendation, Congress should also undertake to eliminate tax deferrals on foreign profits, and to reform foreign subsidiary tax allocation rules to prevent corporations from reducing their U.S. taxable earnings by misallocating expenses such as interest, R&D and overhead, both of which greatly exacerbate the offshoring of jobs and the trade deficit.

   

                                        *********************************

   

  How well the Executive Branch and Congress respond to the significant challenges confronting the American economy will substantially determine whether our nation continues to be the preeminent economic power in the world, or whether it will experience declining political influence and economic leadership.  Only by fully understanding how globalization and current U.S. trade policies are affecting America’s economic well-being can we craft future policies that will advance the welfare of all Americans.    Hopefully, Senators, my recommendations will help you in this task, in ways that preserve the principles of a vibrant middle class, economic growth and mobility, innovation, and economic and social justice.

   

  Thank you for this opportunity.  

• Mr. Lori Wallach

  Director

  Global Trade Watch, Public Citizen
  Read statement

  Testimony

  Mr. Lori Wallach

  Testimony of Lori Wallach

  Director, Public Citizen's Global Trade Watch division

  April 18, 2007

   

  Hearing on Impacts of Current U.S. Trade Policy

  Interstate Commerce, Trade and Tourism Subcommittee of the

  Senate Committee on Commerce, Science and Transportation

   

  Mr. Chairman and members of the subcommittee, on behalf of Public Citizen’s 200,000 members, thank you for the opportunity to share our research on the outcomes of current U.S. trade policy. Public Citizen is a nonprofit research, lobbying and litigation group based in Washington, D.C. Founded in 1971, Public Citizen accepts no government or corporate funds. Public Citizen’s Global Trade Watch division focuses on how the current globalization model and its implementing mechanisms, including the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA), affect Public Citizen’s goals of promoting democracy, economic and social justice, health and safety, and a healthy environment.

   

  First, I would like to recognize the leadership of Subcommittee Chairman, Senator Byron Dorgan, who has tirelessly worked to focus attention on the failings of our current trade regime and the need for change. Chairman Dorgan has methodically tracked the outcome of the current policies and plays a vital role in insisting that if these results are not acceptable, then the model can and must be changed.

   

  Unfortunately for all of us living with the results, the data supporting the need for a new direction in trade policy are extremely compelling. I pray that this hearing helps spur the needed changes. Since the Fast Track system devised by President Nixon was passed in 1974, the agreements it enabled have undermined the interests of most American workers, firms and farmers. Economic damage has been but one outcome. The principle and practice of democracy also has been a casualty. This testimony first focuses on economic outcomes and then describes domestic policies that have been undermined via trade pacts.

   

  This is avoidable damage. A bad process – Fast Track – has enabled bad policy, which in turn has had terrible results. There is nothing inevitable about the negative outcomes my testimony describes. A new policy can achieve better results. Minimally, we must avoid expanding the current failed policy, for instance via a Doha Round WTO escalation or via more NAFTA-model “free trade agreements” (FTAs).

   

  The summary of the damage thus far? Before Fast Track we had balanced trade and rising living standards; since then the U.S. trade deficit has exploded as imports surged, and now we have a deficit equal to 6 percent of our GDP. A deficit of this magnitude is widely agreed to be unsustainable, exposing the U.S. and global economy to risk of crisis, shock and instability. The average American worker is only making a nickel more per hour in inflation-adjusted terms than in 1973, despite impressive productivity gains, while income inequality has jumped to levels not seen since the Robber Baron era. During the NAFTA-WTO era, we have lost three million U.S. manufacturing jobs, one of every six in that sector, devastating local tax bases on which our schools and hospital rely and undermining our ability to produce the basic good essential for our national security and infrastructure. And now, we are even becoming a net food importer!

   

  How have we gotten into this mess? The U.S. Constitution gives Congress exclusive authority to “regulate commerce with foreign nations” (Article I-8.) The Federalist Papers discuss why this structure – and the inherent checks and balances it established – was vital based on the experience of living under a regime where trade policy was determined by the executive – the king in the case of the American colonies. The goal was to ensure that U.S. trade policy was set by the branch of government closest to the people so as to preclude the ability of the president to favor friends of allied foreign governments rather than considering the national interest. Fast Track delegates away to the executive branch Congress’ constitutional authority to control the contents of U.S. trade agreements, as well as numerous other important powers. Happily, another Boston Tea Party or a revolution are not needed to rectify the concentration of trade authority in the hands of the executive, as it is within the power of Congress to do so.

   

  We need a new mechanism for negotiating trade agreements that puts a steering wheel – and when necessary, brakes – on our trade negotiators so that Congress and the public are back in the driver’s seat. Only by replacing the unbalanced, outdated Fast Track trade authority delegation system can we chart a new course on trade that can harness trade’s benefits for the majority.

   

  For those members of the Commerce Committee not in office in 1993 when NAFTA was considered, I respectfully urge you to review the floor debate during which the Commerce Committee’s Vice Chair, Senator Ted Stevens, wisely inquired whether the limits imposed by Fast Track on the Senate are even permissible under the Constitution. Senator Stevens noted that an Article I-7 clause 1[1] provides the Senate a right to amend revenue measures. Trade agreements, by merit of their setting tariff levels, are revenue measures. Fast Track eliminates the Senate’s constitutional right to amend. This is a point worth consider in thinking about what system should replace the Fast Track delegation mechanism. The conclusion of this testimony addresses this issue in more detail.

   

  Fast Track must be replaced. Fast Track enabled trade agreements are devastating the U.S. middle class while increasing poverty and instability overseas. The following data summarizes the outcomes of our current policy. This is not speculation about what could occur or projections based on various assumptions. Following are the actual outcomes, replete with footnotes and details thanks to Global Trade Watch’s research director, Todd Tucker.

   

  1.                  The Results of Current U.S. Trade Policy: Wages Stagnate as Trade Deficits Soar,

        Displacing Good U.S. Jobs

   

  The average American worker is only making a nickel more per hour in inflation-adjusted terms than in 1973, the year before Fast Track was first passed. In 1973, the average American worker made $16.06 hourly in today’s dollars. That same worker only makes $16.11 today, despite U.S. workers’ average productivity nearly doubling since 1973. Better trade policy can do better for America’s workers than this pathetic 0.28 percent raise. Were it not for trade agreements that pit American workers in a race-to-the-bottom with poverty-wage workers worldwide, U.S. workers would see wages increase in a way that more closely tracks productivity increases. Trade pacts that require companies to respect workers’ rights to organize a union would empower workers in developing countries to fight to raise their wages also.

   

  Special protections included in “free trade” agreements for certain sectors, such as Big Pharma, increase consumer prices. As bad trade deals push down our wages, these deals also include provisions that directly jack up consumer prices. Special protections for Big Pharma included in WTO and NAFTA required the United States to provide them longer monopoly patent protections. Did the U.S. Congress really intend to extend U.S. drug patent terms from the pre-WTO and pre-NAFTA 17-year terms to the WTO and NAFTA-required 20-year terms? And, what is such protectionism doing in a “free trade” agreement? The University of Minnesota’s School of Pharmacy found that the WTO and NAFTA windfall patent extensions cost U.S. consumers at least $6 billion in higher drug prices and increased Medicare and Medicaid costs nearly $1.5 billion just for drugs then under patent.[2] The University of Minnesota study only covers medicines that were under patent in 1994, so the total cost to us is much higher.[3]

   

  How our trade policy is suppressing American wage levels. Trade’s downward pressure on our wages comes from both the import of cheaper goods made by poorly-paid workers abroad (displacing goods made by better-paid U.S. workers) and threats during wage bargaining by employers that they will move overseas. The result is growing inequality among Americans, with workers losing while the richest few enjoy massive gains. The pro-Fast Track Peterson Institute for International Economics estimates that as much as 39 percent of the observed growth in U.S. wage inequality is attributable to trade trends.[4] Most proponents of the NAFTA-WTO status quo trade model acknowledge this connection. But they argue that even so, U.S. workers win when imports produced by low-paid workers overseas increase because it means cheaper stuff for all of us. However, in fact when the actual data is plugged into the trade theory, the reality is quite different.

   

  Now for the vast majority of Americans, the gains in lower prices from trade are being outweighed by wage losses – meaning net losses for most. When the non-partisan Center for Economic and Policy Research applied the actual data to the trade theory, they discovered that when you compare the lower prices of cheaper goods to the income lost from low-wage competition under our current policy, the trade-related losses in wages hitting the vast majority of American workers outweigh the gains in cheaper priced goods from trade. U.S. workers without college degrees (over 70 percent of us) lost an amount equal to 12.2 percent of their wages, so for a worker earning $25,000 a year, the loss would be more than $3,000 per year![5] Talk about unfair trade. We need new trade agreements and policies that guarantee that the gains from trade outweigh the losses for most Americans.

   

  Before Fast Track we had balanced trade; since it was instituted, the U.S. trade deficit has exploded as imports surged. The pre-Fast Track period was one of balanced trade for the United States and rising living standards for most Americans. In fact, in 1973, the United States had a slight trade surplus, as it had in nearly every year since World War II. But in every year since Fast Track was first implemented, the United States has run a trade deficit. And since Fast Track got us into NAFTA and the WTO, the U.S. trade deficit surged from under $100 billion to nearly $800 billion – that is six percent of national income! This huge trade deficit is widely agreed to be unsustainable, meaning unless we implement policies to shrink that deficit, the U.S. and global economies are exposed to risk of crisis, shock and instability.

   

  Imports into the United States from the countries with whom the United States has FTAs are growing considerably faster than exports from the United States, meaning our FTAs are actually increasing the U.S. trade deficit. USTR has claimed that U.S. exports to countries with which we have FTAs beat non-FTA exports, however to come up with the data they use to support this claim, they conveniently exclude the three FTA nations with which we have the biggest deficits: Mexico, Canada and Israel. When you put these nations back into the calculation, the U.S. annual export growth rate 2001-2006 to our FTA partners is 22.67 percent – below U.S. exports to non-FTA nations and to the world as a whole. In fact, the Bush administration itself knows well that U.S. FTAs lead to growth in bilateral trade deficits. In an October 2006 speech to a Korean audience, Deputy USTR Karan Bhatia said that it was a myth that “The U.S. will get the bulk of the benefits of the FTA. If history is any judge, it may well not turn out to be true that the U.S. will get the bulk of the benefits, if measured by increased exports. From Chile to Singapore to Mexico, the history of our FTAs is that bilateral trade surpluses of our trading partners go up” [italics added].[6]

   

   

  Source: Analysis of U.S. International Trade Commission numbers.

   

  The United States has large and growing trade deficits with all of its major FTA partners and with the group of FTA nations as a whole. And in the cases of Mexico and Jordan, we went from small surpluses to large deficits. There are no tricks here: all 13 FTA nations are presented in order of accession. Since USTR didn’t adjust for inflation, we didn’t either. USTR included several FTA nations that haven’t had a full calendar year of FTA treatment (and others like CAFTA nations whose U.S. exports temporarily crashed due to the Administration’s embarrassing textile rules of origin mix-up): we give the administration benefit of the doubt and compare the full year-to-year trade balance. As you can see, the small surpluses we now (and perhaps temporarily) enjoy with the tiny CAFTA markets do not outweigh the large and growing deficits with our more important FTA partners. Numbers in bold and in parentheses represent deficits.

   

  Table 1: U.S. FTAs = Large and Growing Trade Deficits

  Country	Entry Date	Date of Entry Trade Balance	2006 Trade Balance	$ Change from Entry to Present
  Israel*	1985	($651,386,137)	($11,062,816,493)	($10,411,430,356)
  Canada	1989	($13,010,182,276)	($104,807,513,391)	($91,797,331,115)
  Mexico	1994	$530,787,754	($82,493,273,675)	($83,024,061,429)
  Jordan	2001	$110,019,449	($797,938,097)	($907,957,546)
  Chile	2004	($1,771,368,610)	($3,330,114,125)	($1,558,745,515)
  Singapore	2004	$3,001,393,110	$4,161,051,450	$1,159,658,340
  Australia	2005	$7,278,102,445	$8,592,539,836	$1,314,437,391
  Morocco	2006	$49,296,037	$322,704,253	$273,408,216
  CAFTA-DR	2006
  El Salvador		($203,985,314)	$240,060,256	$444,045,570
  Guatemala		($457,372,341)	$195,816,702	$653,189,043
  Honduras		($603,278,117)	($163,867,841)	$439,410,276
  Nicaragua		($592,042,526)	($820,712,923)	($228,670,397)
  Bahrain	2006	($119,873,998)	($161,641,962)	($41,767,964)
  Total FTA Deficit			($190,125,706,010)

  Source: U.S. International Trade Commission numbers. (*Measured since 1989 due to data availability;

  2006 FTAs’ deficit growth measured 2006 relative to 2005.)

  Now the United States is even poised to become a net food importer! Unbelievably, due to this import surge, the United States is even becoming a net food importer. While U.S. farmers were told by NAFTA-WTO supporters that they would be “breadbasket to the world,” nearly 300,000 family farms have been shuttered since the pacts went into effect.[7] Now we’re importing massive amounts of the grains and feeds we also export, and running a deficit in most categories of foods that wind up on our dinner table, including fruits, vegetables and more.[8] We can reverse this mess, and we must to avoid major economic damage.

   

  Over 3 million American manufacturing jobs – 1 in out of every 6 – lost. The U.S. manufacturing sector has long been a source of innovation, productivity, growth and good jobs.[9] But by the end of 2006, the United States had only 14 million manufacturing jobs left – nearly 3 million fewer than before NAFTA and the WTO.[10] The U.S. Labor Department has a list of nearly 1.7 million U.S. workers that have specifically lost their job to trade during the NAFTA-WTO era – and that is under just one narrow program that excludes many of the trade pacts’ victims.[11] Further, the non-partisan Economic Policy Institute estimates that as many as 7 million additional manufacturing jobs could have been supported in the U.S. economy were it not for this massive trade deficit caused by our bad trade policy.[12] The good news is that this outcome is neither random nor inevitable: bad policy led to bad results. We can change our trade policy-making process and get good agreements that create good jobs – and rebuild our now-dwindling ability to manufacture the products on which our nation’s very security and well-being rely.

   

  Devastation of America’s manufacturing base is eroding the tax base that supports our schools and hospitals. The erosion of our manufacturing base during the Fast Track era means fewer firms and fewer well-paid workers to contribute to local tax bases. Research has shown that the broader the manufacturing base, the wider is the local tax base and offering of social services.[13] With the loss of manufacturing, fiscal resources that could be used for social services declined,[14] while welfare enrollments increased.[15] This has resulted in the virtual collapse of some local governments.[16] These “trade” pacts also undermine our access to essential services by requiring that many services be privatized and/or deregulated so that public services are transformed into new for-profit commodities that only those who can afford to purchase can obtain.[17]

   

  The off-shoring of American jobs is moving rapidly up the income and skills ladder. Economy.Com estimates that nearly one million U.S. jobs have been “off-shored” since early 2001 alone, with 1 in 6 of those in Information Technology, engineering, financial services and other business services.[18] Progressive Policy Institute, a pro-NAFTA-WTO think tank, found that 12 million information-based U.S. jobs – 54 percent paying better than the median wage – are highly susceptible to off-shoring.[19] Independent academic studies put the number of jobs susceptible to off-shoring much higher. Alan Blinder, a former Fed vice-chair, Princeton economics professor, and NAFTA-WTO supporter, says that 28 to 42 million service sector jobs (or about 2 to 3 times the total number of current U.S. manufacturing jobs) could be off-shored in the foreseeable future.[20] Yet, if we were to implement policies to forbid off-shoring of certain types of jobs to nations that do not provide adequate privacy protections for confidential health and financial data for example, we could have a much lower rate of job off-shoring. Europe already has this policy in place.[21]

   

  Bad trade policy downgrades quality of U.S. jobs available. Trade affects the types and quality of jobs available – and our wage levels – not the number of total jobs. We lost millions of manufacturing jobs during NAFTA and WTO, but overall unemployment has been fairly stable as new service sector jobs were created. Proponents of the NAFTA-WTO status quo often raise this point to claim that recent trade policies have not hurt most American workers. But, what they do not mention is that the quality of jobs available to the majority of U.S. workers – and the wages we can earn – have all been degraded by our trade policy. For instance, the average worker displaced during this period from manufacturing went from earning $40,154 to $32,123 when re-employed.[22] The loss of workers’ bargaining power caused by so many off-shored U.S. jobs – first in manufacturing, now in services too – means stagnant wages for all of us. Under NAFTA and WTO we are forced to compete in the same labor market as poor countries’ less-than-$1 per day workers in a perpetual race-to-the-bottom.

  2.                  The Results of Current U.S. Trade Policy: Increased Income Inequality in the U.S.

  and Worldwide

   

  The inequality between rich and poor in America has jumped to levels not seen since the Robber Baron era. The richest 10 percent of Americans are taking nearly half of the economic pie, while an even more elite group – the top one percent of the income distribution – is taking nearly a sixth of the pie. Rich Americans’ share of national income was stable for the first several decades after World War II but shot up 40 percent for the richest 10 percent and 124 percent for the richest 1 percent between 1973 and 2005 – the Fast Track era.[23] Nearly all economists agree that our trade policy has partially driven this widening inequality. We must replace the trade policies causing this rift. Reversing this trend is vital to the health of American democracy.

   

  How could American workers’ productivity double, but wages stay flat? Trade policy shifts during the Fast Track era also have had a direct impact on American workers’ ability to bargain for higher wages. In the past, American workers represented by unions were able to share in the economic gains generated by productivity increases – by bargaining for their fair share. But since the Fast Track-enabled NAFTA and WTO went into effect, as many as 62 percent of U.S. union drives face employer threats to relocate abroad, according to U.S. government-commissioned studies. And indeed, the factory shut-down rate following successful union certifications tripled since NAFTA went into effect.[24] Meanwhile, these deals forbid federal and state governments from requiring that U.S. workers perform the jobs created by the outsourcing of government work. Such “anti-off-shoring” policies – as well as prevailing wage laws designed to ensure goods wages for construction work – are subject to challenge in foreign tribunals for violating the pacts’  rules. The Fast Track-hatched trade agreements’ attack on America’s working families’ ability to lift themselves up has led increasing numbers to turn against any active expansion of international trade.[25] We need a new way to make U.S. trade agreements that guarantees working families’ get a fair shake.

   

  The worldwide gulf between rich and poor has also widened since Fast Track. Remember all the hype about how these trade agreements would reduce poverty in the developing countries? We still hear this line today. Yet, the reality is that the corporate globalization era policies enabled by Fast Track have increased income inequality between developed and developing countries. Income inequality has also increased between rich and poor within many nations under this retrograde trade model. In 1960, the 20 richest nations earned per capita incomes 16 times greater than non-oil producing, less developed countries. By 1999, the richest countries earned incomes 35 times higher, signifying a doubling of the income inequality.[26] According to one United Nations study, the richest 1 percent of the world’s population receives as much as the poorest 57 percent.[27] According to another UN study, “in almost all developing countries that have undertaken rapid trade liberalization, wage inequality has increased, most often in the context of declining industrial employment of unskilled workers and large absolute falls in their real wages, on the order of 20-30 percent in Latin American countries.”[28] The gap is worsening over time, but a trade policy designed to benefit the majority can turn this trend around.

   

   

  3.   Fast Track’s Legacy: Stagnant Growth, Poverty and Hunger in Poor Countries

   

  Progress on growth and social development in poor countries slows during the Fast Track era. Increasing economic growth rates mean a faster expanding economic pie. With more pie to go around, the middle class and the poor have an opportunity to gain without having to “take” from the rich – often a violent and disruptive process. But the growth rates of developing nations slowed dramatically in the Fast Track period. For low- and middle-income nations, per capita growth between 1980 and 2000 fell to half that experienced between 1960 and 1980! The slowdown in Latin America was particularly harmful. There, income per person grew by 75 percent in the 1960-80 period, before the International Monetary Fund (IMF) began imposing the same package of economic, investment, and trade policies found in NAFTA and the WTO. Since adopting the policies, per capita income growth in Latin America plunged to 6 percent in the 1980-2000 period. Even when taking into account the longer 1980-2005 period, there is no single 25-year window in the history of the continent that was worse in terms of rate of income gains. In other world regions, growth also slowed dramatically, while in Sub-Saharan Africa, income per person actually shrank 15 percent after the nations adopted the policy package also required under the WTO and NAFTA![29] Improvement measured by human indicators – in particular life expectancy, child mortality, and schooling outcomes – also slowed for nearly all countries in the Fast Track period as compared with 1960-80.[30] In numerous Latin American countries, people have risen up at the ballot box to elect new governments that reject these failed policies and who are implementing better alternatives – providing a hopeful example to the world.

   

  Poverty, hunger and displacement on the rise. The share of the population living on less than $2 a day in Latin America and the Caribbean rose following the implementation of NAFTA-WTO-style policies. And the share of people living on less than $1 a day (the World Bank’s definition of extreme poverty) in the world’s poorest regions, including Sub-Saharan Africa and the Middle East, has increased during the same period,[31] as the IMF and World Bank and then WTO imposed this model. According to the Food and Agriculture Organization, global efforts toward reducing hunger have “stalled completely worldwide” during the WTO era.[32] During the Fast Track era, as nations have begun adopting NAFTA-WTO style policies – from Mexico[33] to China[34] and beyond – the displaced rural poor have had little choice but to immigrate to wealthy countries or join swelling urban workforces where the oversupply of labor suppresses wages, exacerbating the politically and socially destabilizing crisis of chronic under- and unemployment in the developing world’s cities. After NAFTA, Mexican immigration to the United States jumped 60 percent after over a million campesinos lost their livelihoods to NAFTA-style policies.[35] Desperation and social instability is growing among many poor nations’ vast rural populations. According to the Indian government, thousands of farmers bankrupted by trade policies commit suicide every year, leaving their children and families without alternate means of support.[36] Both American workers and farmers and our counterparts in poor countries are all suffering under the current trade and globalization system – united, they represent a global majority for a change of course.

   

  Developing countries that did not adopt the package fared better. In sharp contrast, nations that chose their own economic mechanisms and policies through which to integrate into the world economy had more economic success. For instance, China, India, Malaysia, Vietnam, Chile, and Argentina since 2002, have had some of the highest growth rates in the developing world over the past two decades – despite largely ignoring the directives of the WTO, IMF or World Bank.[37] It is often claimed that the successful growth record of countries like Chile was based on the pursuit of NAFTA-WTO-like policies. Nothing could be farther from the truth: Chile’s sustained rapid economic growth was based on the liberal use of export promotion policies and subsidies that are now considered WTO-illegal.[38] It is only now that many of these countries are bringing their policies down to the WTO’s anti-development strictures that their economies are beginning to unravel.

   

  4. Important domestic policies have been undermined by “trade” agreements

   

  Many people are surprised when they first learn that actual trade between countries is only one element of the policies established and enforced by NAFTA and the WTO, which also require that countries alter wide swaths of domestic non-trade policy or face sanctions. NAFTA and the WTO are dramatically different from all other trade agreements that preceded them. Traditionally, trade agreements focused on tariffs, quotas and border customs inspections. NAFTA and the WTO exploded the boundaries of what was included in trade pacts, establishing over 800 pages of non-tariff policies to which signatory countries must conform their domestic laws. Those new agreements set constraints on signatory countries’ domestic food safety standards, environmental and product safety rules, service-sector regulation, investment and development policy, intellectual property standards, government procurement rules, tax policy and more. A key WTO and NAFTA provision specifically requires each signatory country to ensure the conformity of all of its laws, regulations and administrative procedures to the agreements’ terms.[39] Other WTO and NAFTA signatory nations – and foreign investors through NAFTA and its various extensions such as the Central America Free Trade Agreement (CAFTA) and other bilateral FTAs – can challenge U.S. national or local policies before an international tribunal for failure to comply with the agreements’ terms. Nations whose policies are judged not to conform to the agreements’ rules are ordered to eliminate them or face permanent trade sanctions.

   

  One commenter called NAFTA a “hunting license” for those seeking to challenge state laws in the name of “free trade.”[40] Unfortunately, the evidence has borne this out, as a range of non-trade issues reserved for state and local governments − such as local prevailing wage laws and other procurement policies; state and local “Buy America” procurement policies; low-cost health care programs; higher education policy; and state funding for public services, the environment, and even local libraries − are now under current NAFTA or WTO jurisdiction, or are being targeted for such by trade negotiators around the globe. The U.S. State Department, lobbying about how a state law might violate WTO, pressured Maryland state legislators to drop a procurement policy aimed at promoting human rights in Nigeria. California Governor Schwarzenegger vetoed a California law requiring a portion of highway pavement to use recycled tires because this would violate trade agreement procurement rules.

   

  The United States is the country which has faced the largest number of WTO challenges to its laws, and has lost 86 percent of such cases. The diversity of U.S. laws that have been successfully challenged using WTO or NAFTA is stunning. The United States has been ordered by a NAFTA tribunal to open its road to Mexico-domiciled trucks regardless of whether the vehicles or drivers meet U.S. safety standards. Under the WTO, U.S. tax, environmental, anti-dumping, safeguard, procurement and gambling policies have all been challenged. The United States has been the number one target of challenges at the WTO, where domestic laws are almost always ruled against in tribunal hearings. The United States’ record at the WTO is also unique in that its win record for cases it has brought against other countries at WTO is lower than the average win rate, as you can see in this table.

   

  U.S. WTO disputes:

  	United States as Complainant	United States as Respondent	All Disputes (including U.S. and non-U.S. cases)
  Complainant Win	24	43	114
  Respondent Win	5	7	15
  % Cases Won By Complainant	82.8%	86.0%	88.4%

   

   

  The United States has lost an array of WTO attacks against domestic public interest laws, a pattern which extends to successful WTO attacks on other nations’ environmental, food safety and other public interest laws. The United States weakened gasoline cleanliness standards after a successful WTO assault on Clean Air Act regulations by several countries. Even though the United States signed a global environmental treaty called the Convention on International Trade in Endangered Species, American rules requiring shrimp fishers not to kill sea turtles were diluted after a WTO challenge to U.S. Endangered Species Act regulations enforcing the treaty. The U.S. Marine Mammal Protection Act was weakened after Mexico threatened WTO action to enforce an outstanding ruling against the law under the General Agreement on Tariffs and Trade (GATT). Now the dolphin-safe label no longer means that tuna caught with dolphin-deadly encirclement nets is banned from U.S. stores, but that tuna can bear the dolphin-safe label as long as no dolphin death was observed! These are only a few of the negative results of nine years of WTO implementation.

   

  Non-trade public interest laws challenged at WTO:

  	All Public Interest Disputes	Public Interest Disputes – U.S. as Complainant	Public Interest Disputes – U.S. as Respondent
  Complainant Win	16	7	5
  Respondent Win	3	2	0
  % Cases Won By Complainant	84.2%	77.8%	100%

   

  Domestic laws having nothing to do with trade have been successfully attacked, including the U.S. ban on Internet gambling. A WTO enforcement panel just ruled that the United States government failed to comply with a 2005 final WTO order to change certain laws related to the U.S. ban on Internet gambling. The WTO Internet gambling ruling implicates large swaths of state and federal gambling law unrelated to online gaming as potential trade barriers, and a follow-on WTO challenge already has been threatened by the European Union. The ruling clears the way for Antigua, which challenged the ban, to demand compensation from the United States, and if an agreeable deal cannot be struck, to impose trade sanctions. To exact compliance, Antigua could suspend benefits it extends to the United States under other WTO agreements. Antigua could, for instance, suspend its observance of copyright and patent protections required by the WTO to a degree deemed equivalent to Antigua’s commercial losses from its Internet gambling operations being excluded from the U.S. market. One of the most significant consequences of the WTO’s 2005 ruling is that an array of common state gambling regulations such as gambling bans, state lotteries or exclusive Indian gaming rights, which have the unintended effect of keeping out private European lotteries and casinos, were implicated as trade violations and placed in jeopardy of future challenges. In 2005, 29 state attorneys general wrote the Bush administration seeking withdrawal of the gambling sector from WTO jurisdiction. The WTO GATS agreement allows nations to “take back” service sectors from WTO jurisdiction, but only after compensating trading partners for lost business opportunities. The Bush administration has refused to do so.

  There have been 35 WTO attacks on U.S. anti-dumping, countervailing duty, and safeguard (AD-CVD) law and the United States lost 33 of these cases.

   

  Anti-Dumping/Countervailing Duty/Safeguards disputes:

  	United States as Complainant	United States as Respondent	All AD/CVD/SG cases (any country as Respondent)
  Complainant Win	2	33	49
  Respondent Win	0	4	6
  % Cases Won By Complainant	100%	89.2%	89.1%

   

  Multi-million dollar cases against the United States are pending under NAFTA’s “Chapter 11” foreign investor protection enforcement system, while the cost of successfully defending just one NAFTA Chapter 11 attack on U.S. law cost $3 million. Canadian cattle producers are using NAFTA to demand $300 million in compensation from U.S. taxpayer funds, claiming that the Canadian cattle import ban instituted after mad cow disease was found in Canada violates their NAFTA rights. A Canadian tobacco company is using the private NAFTA tribunals to attack the U.S. tobacco settlements. A California regulation requiring the backfilling of open-pit mines has been challenged by a Canadian mining enterprise, which plans to develop a giant open-pit cyanide gold mine in Imperial Valley, California, and which owns and operates similar mines around the world. These are among the 48 cases or claims filed thus far by corporate interests and investors under NAFTA’s “Chapter 11” investor provisions, which grant foreign interests more expansive legal rights and privileges than those enjoyed by U.S. citizens or corporations. With only 14 of the 48 cases finalized, some $36 million in taxpayer funds have been granted to five corporations that have succeeded with their claims. These cases include successful attacks on a government’s use of zoning laws and operating permits to regulate a toxic waste dump closed for contamination problems, the ban on cross-border PCB trade, the ban of a toxic chemical and logging regulations. An additional $28 billion has been claimed from investors in all three NAFTA nations. The U.S. government’s legal costs for the defense of just one recent case topped $3 million. Seven cases against the United States are currently in active arbitration.

   

  Imports of food into the United States have soared under the WTO and NAFTA while inspection has declined and “equivalence” rules requires us to accept food that does not meet our standards. The WTO and NAFTA have resulted in a dramatic increase of dangerous food being imported into the United States.[41] The rules of these agreements have also greatly restricted the United States’ ability to protect the public from unsafe food. Imported food is more than three times more likely to be contaminated with illegal pesticide residues than U.S.-grown food, according to new analysis of FDA data. Meanwhile U.S. food imports have skyrocketed, U.S. inspections of imported food have declined significantly.[42] Imports of Mexican crops documented by the U.S. government to be at a high risk of pesticide contamination have dramatically increased under NAFTA, while inspection has decreased. Approximately 74 U.S. import inspectors are responsible for inspecting nearly 2.4 billion pounds of imported meat and poultry. Food-borne illness is on the rise globally and in the United States due in part to the “globalization” of the food supply. NAFTA and WTO require the United States to accept imports of food meeting “equivalent” but no U.S. safety standards. For instance, the Uruguay Round Agreements Act made statutory changes to the Federal Meat Inspections Act and the Poultry Products Inspection Act that in 1995 resulted in a minor, seemingly insignificant change to the U.S. meat and poultry regulations, when the words “equal to” were replaced with the word “equivalent” – a statutory change in the trade implementing legislation that was then used to change the regulations applying to imported meat.[43] Under the trade agreement-required new rules, more than 40 nations’ meat inspection systems have been declared equivalent and imports are now allowed and obtain USDA labels, even though some of this imported food is inspected by company employees, not independent government inspectors as required under U.S. law.[44]

   

  \

  Conclusion: Replace the Past Track with a good process to change course from our failed status quo trade policies

   

  Fast Track was designed 30 years ago as a way to deal with traditional tariff and quota-focused trade deals. Today’s “trade” agreements affect a broad range of domestic non-trade issues like local prevailing wage laws, Buy-America procurement policy, anti-off-shoring measures, food safety, land use and zoning, the environment and even local tax laws. Congress, state officials and the public need a new modern procedure for developing U.S. trade policy that is appropriate to the reality of 21^st century globalization agreements.

   

  Fast Track’s structural design ensures Congress cannot hold executive branch negotiators accountable to meet the negotiating objectives Congress sets in Fast Track legislation. Thus, simply adding new negotiating objectives to the existing Fast Track structure, for instance regarding labor and environmental issues, will not result in trade agreements that reflect Congress’ goals and objectives. In fact, the 1988 Fast Track used to negotiate and pass NAFTA and WTO explicitly required that labor rights be included in U.S. trade agreements. President George Herbert Walker Bush and his negotiators simply ignored these objectives, while satisfying the negotiating objectives desired by their business supporters. Under Fast Track, the Bush administration was empowered to sign such agreements despite failing to meet Congress’ labor rights objectives and submit them for a no-amendments, expedited vote. Members of Congress were thus forced into a position of having to vote against these entire agreements, having no earlier recourse to ensure the agreements met the objectives necessary to make them supportable.

   

  This is because Fast Track ensures that Congress’ role is performed too late to do any good: Congress only gets a “yes” or “no” vote on a trade agreement after it’s been signed and “entered into.” That vote also okays hundreds of changes to wide swaths of U.S. non-trade law to conform our policies to what the “trade” deals require. By eliminating Congress’ right to approve an agreement’s contents before it is signed, Fast Track also allows outrageous provisions to be “super glued” onto actual trade provisions. Did the U.S. Congress really intend to extend U.S. drug patent terms from the pre-WTO 17-year terms to the WTO-required 20-year terms? Because under Fast Track, Congress never had the ability to review, much less vote on the WTO text before it was signed, this and numerous other outrageous non-trade policy changes were bundled in with legitimate trade provisions.

   

  Federalism is also flattened by Fast Track. In a form of international pre-emption, state officials also must conform our local laws to hundreds of pages of non-trade domestic policy restrictions in these “trade” pacts, yet state officials do not even get Congress’ cursory role. Fast Track is how we got stuck with NAFTA, WTO and other race-to-the-bottom deals.

   

  Fast Track trashes the “checks and balances” that are essential to our democracy – handcuffing Congress, state officials and the public so we cannot hold U.S. negotiators accountable during trade negotiations while corporate lobbyists call the shots. In one lump sum, Fast Track:

   

  ·         Delegates away Congress’ ability to veto the choice of countries with which to launch negotiations.

   

  ·         Delegates away Congress’ constitutional authority to set the substantive rules for international commerce. Congress lists “negotiating objectives,” but these are not mandatory or enforceable and executive branch negotiators regularly ignore them. In fact, the 1988 Fast Track used for NAFTA and WTO explicitly required that labor rights be included in U.S. trade agreements.

   

  ·         Fast Track permits the executive branch to sign trade agreements before Congress votes on them, locking down the text and creating a false sense of crisis regarding congressional wishes to change provisions of a signed agreement.

   

  ·         Fast Track empowers the executive branch to write legislation (Congress’ constitutional role), circumvent normal congressional committee review, suspend Senate cloture and other procedures, and have guaranteed “privileged” House and Senate floor votes 90 days after the president usurps one more congressional role by submitting legislation (Congress’ role).

   

  ·         Fast Track rules forbids all amendments and permits only 20 hours of debate on the signed deal and conforming changes to U.S. law.

   

  All of these authorities are transferred to the executive branch conditioned only on the requirement the executive branch gives Congress 90-day notice of its intent to start negotiations with a country and then another 90-day notice before it signs a completed agreement. Congress has no recourse to revoke its delegation of authority if the executive branch ignores the negotiating objectives Congress lists in its Fast Track statutes. The closed rule, expedited procedures for consideration can only be revoked for failure to go through specific notices and formal consultations, while failure to listen is not actionable.

   

  Fast Track must be replaced so that we can steer a new course on trade policy. Critical to such a new system is restoring Congress’ ability to control the contents of U.S. trade agreements, as well as empowering Congress to decide with which countries it is in our national interest to negotiate new agreements. Because the Constitution grants the executive branch the exclusive authority to negotiate on behalf of the United States with foreign sovereigns, a system of cooperation between the Congress and executive branch is needed. However, in contrast to Fast Track, which by its very structural design sidelines Congress, a new trade negotiating mechanism must provide early and regular opportunities for Congress to hold negotiators accountable to the substantive objectives Congress sets.

   

  This is needed to ensure future pacts contain terms beneficial to most Americans. With a new forward-looking trade negotiating process, we can ensure U.S. trade expansion policy meets the needs of America’s working families, farmers and small businesses.

   

  ENDNOTES         

  
  

  ---

  [1] Article 1-7-clause 1: “All bills for raising Revenues shall originate I the House of Representatives, but the Senate may propose or concur with Amendments as on other Bills.”

  [2] Stephen W. Schondelmeyer, Economic Impact of GATT Patent Extension on Currently Marketed Drugs, PRIME Institute, College of Pharmacy, University of Minnesota, March 1995, at Table 1.

  [3] Stephen W. Schondelmeyer, “The Extension of GATT Patent Extension on Currently Marketed Drugs,” PRIME Institute, University of Minnesota, March 1995, at 6-7.

  [4] William Cline, Trade and Income Distribution, (Washington, D.C.: Peterson Institute for International Economics, 1997).

  [5] Dean Baker and Mark Weisbrot, “Will New Trade Gains Make Us Rich?” Center for Economic and Policy Research (CEPR) Paper, October 2001.

  [6] Remarks by Ambassador Karan Bhatia, Deputy U.S. Trade Representative at Yonsei University, Oct. 24, 2006. Available at http://seoul.usembassy.gov/embact102406.html.

  [7] From numbers for the USDA’s “limited resources,” “farming occupation – lower sales,” and “farming occupation – higher sales” farm typology categories. See USDA’s Economic Research Service’s “Farm Business and Household Survey Data: Customized Data Summaries for Agricultural Resource Management Survey,” for numbers after 1996, and “Farm structure: historic data on farm operator household income” data tables for numbers prior to 1996.

  [8] Foreign Agricultural Trade of the United States, available at http://www.ers.usda.gov/Data/FATUS/.

  [9] Bob Baugh and Joel Yudken, “Is Deindustrialization Inevitable?” New Labor Forum, 15(2), Summer 2006.

  [10] L. Josh Bivens, “Trade Deficits and Manufacturing Job Loss: Correlation and Causality,” Economic Policy Institute Briefing Paper 171, March 14, 2006.

  [11] Department of Labor Trade Adjustment Assistance certifications, at http://www.citizen.org/trade/forms/taa_info.cfm.

  [12] Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, State of Working America 2006-2007, (Washington, D.C.: Economic Policy Institute, 2006), Table 3.30 at 175.

  [13] Henri Capron and Olivier Debande, “The Role of the Manufacturing Base in the Development of Private and Public Services,” Regional Studies, Vol. 31:7, October 1997, at 681. For an overview of these issues, see Adam Hersh and Christian Weller, “Does Manufacturing Matter?” Challenge, vol. 46, no. 2, March-April 2003.

  [14] Corliss Lentz, “Why Some Communities Pay More Than Others? The Example of Illinois Teachers,” Public Administration Review, 58:2, March-April 1998. This study shows that high levels of manufacturing employment are associated with higher starting salaries for public school educators.

  [15] David Brady and Michael Wallace, “Deindustrialization and Poverty: Manufacturing Decline and AFDC Recipiency in Lake County, Indiana, 1964-93,” Sociological Forum¸ Vol. 16, Number 2, 2001.

  [16] Robert Forrant, “Greater Springfield Deindustrialization: Staggering Job Loss, A Shrinking Revenue Base, and Grinding Decline,” University of Massachusetts-Lowell Working Paper, April 2005.

  [17] See http://www.citizen.org/trade/subfederal/services/ for more detail.

  [18] Marla Dickerson, “‘Off-shoring’ Trend Casting a Wider Net,” Los Angeles Times, Jan. 4, 2004.

  [19] Robert D. Atkinson, “Understanding the Offshore Challenge,” Progressive Policy Institute Policy Report, May 24, 2004.

  [20] Alan S. Blinder, “Off-shoring: The Next Industrial Revolution?” Foreign Affairs, March-April 2006.

  [21] Lori Wallach, Fiona Wright and Chris Slevin, “Addressing the Regulatory Vacuum: Policy Considerations Regarding Public and Private Sector Service Job Off-shoring,” Public Citizen’s Global Trade Watch, June 2004.

  [22] Lael Brainard, Robert E. Litan, And Nicholas Warren, “Insuring America’s Workers in a New Era of Off-shoring,” Brookings Institution Policy Brief No. 143, July 2005, at 2.

  [23] Thomas Piketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research Paper 11955, January 2006; numbers updated through 2005 in a March 2007 extract.

  [24] Kate Bronfenbrenner, “The Effects of Plant Closing or Threat of Plant Closing on the Right of Workers to Organize,” North American Commission for Labor Cooperation Report, 1997.

  [25] Peronet Despeignes, “Poll: Enthusiasm for free trade fades; Dip sharpest for $100K set; loss of jobs cited,” USA Today, Feb. 24, 2004.

  [26] UNCTAD, Least Developed Countries Report, 2002, at 17.

  [27] UN Development Program, “Human Development Report: Millennium Development Goals: A compact among nations to end human poverty,” 2003, at 39.

  [28] United Nations Conference on Trade and Development (UNCTAD), Least Developed Countries Report, 1998, at 3.

  [29] Mark Weisbrot, Robert Naiman and Joyce Kim, “The Emperor Has No Growth: Declining Economic Growth Rates in the Era of Globalization,” CEPR Paper, November 2000.

  [30] Mark Weisbrot, Dean Baker and David Rosnick, “Scorecard on Development: 25 Years of Diminished Progress,” CEPR Paper, September 2006.

  [31] Shaohua Chen and Martin Ravaillon, “How Have the World’s Poorest Fared since the Early 1980’s?” World Bank Research Observer, Vol. 19, Number 2, 2004, at 152-3.

  [32] Food and Agriculture Organization, “The State of Food Insecurity in the World,” United Nations Report, 2005, at 6.

  [33] Carlos Salas, “Between Unemployment and Insecurity in Mexico,” Economic Policy Institute, September 2006.

  [34] “Chinese farmers face bleak future,” BBC News, Dec. 14, 2000.

  [35] Jeffrey S. Passel and Roberto Suro, “Rise, Peak and Decline: Trends in U.S. Immigration 1992 – 2004,” September 2005, Pew Hispanic Center, at 39; George J. Borjas and Lawrence J. Katz, “The Evolution of the Mexican-Born Workforce in the United States,” March 2006; World Bank data; John Audley, Sandra Polaski, Demetrios G. Papademetriou, and Scott Vaughan, “NAFTA’s Promise and Reality: Lessons from Mexico for the Hemisphere,” Carnegie Endowment for International Peace Report, November 2003.

  [36] Somini Sengupta, “On India’s Farms, a plague of suicide,” New York Times, Sept. 19, 2006; Anders Riel Müller and Raj Patel, “Shining India? Economic Liberalization and Rural Poverty in the 1990s,” Food First Policy Brief No. 10, May 2004.

  [37] Mark Weisbrot, Dean Baker and David Rosnick, “Scorecard on Development: 25 Years of Diminished Progress,” CEPR Paper, September 2006.

  [38] Todd Tucker, “The Uses of Chile: How Politics Trumped Truth in the Neo-Liberal Revision of Chile’s Development,” Public Citizen’s Global Trade Watch, September 2006.

  [39] See e.g. Agreement Establishing the WTO, Article XVI-4.

  [40] Michelle Sager, One Voice or Many? Federalism and International Trade, (New York: LFB Scholarly Publishing LLC, 2002), at 94.

  [41] U.S. Department of Agriculture, Foreign Agricultural Service import statistics.

  [42] “Much Is Being Done To Protect Agriculture From A Terrorist Attack, But Important Challenges Remain,” Government Accountability Office, GAO 05-214, March 2005.

  [43] 60 Fed. Reg. 38667, Jul. 28, 1995.

  [44] “The WTO Comes to Dinner: U.S. Implementation of Trade Rules Bypasses Food, Safety Requirements,” Public Citizen, July 2003.

• Mr. Christopher Wenk

  Senior Director

  International Policy, U.S. Chamber of Commerce Commerce
  Read statement

  Testimony

  Mr. Christopher Wenk

  United States Senate

  Committee on Commerce, Science & Transportation

  Interstate Commerce, Trade and Tourism Subcommittee

   

  Hearing on Is “Free Trade” Working?

   

  Wednesday, April 18, 2007

  10:00 a.m.

  253 Russell Senate Office Building

   

   

  Testimony by

  Christopher Wenk

  Senior Director, International Policy

  U.S. Chamber of Commerce

   

  On behalf of the U.S. Chamber of Commerce, I am pleased to appear before the Senate Commerce Subcommittee on Interstate Commerce, Trade and Tourism to provide testimony on how trade is working for the U.S. economy. International trade plays a vital part in the expansion of economic opportunities for American workers, farmers, and businesses.  As the world’s largest business federation — representing more than three million businesses and organizations of every size, sector, and region — the U.S. Chamber views efforts to expand trade opportunities as squarely in the interests of America’s workers, farmers, consumers, and companies.

   

  As such, the Chamber has helped lead the business community’s effort to make the case for initiatives to expand trade, including global trade negotiating rounds under the purview of the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade, as well as bilateral and regional free trade agreements (FTAs).  The Chamber does so because U.S. businesses have the expertise and resources to compete globally — if they are allowed to do so on equal terms with our competitors.

   

  Trade, Growth, and Prosperity

   

  The facts show that while some are hurt — and should be helped — the overwhelming majority of Americans derive great benefits from international trade and investment.  America’s international trade in goods and services accounts for roughly 27% of the country’s GDP.  As the Office of the U.S. Trade Representative has pointed out, the combined effects of the North American Free Trade Agreement (NAFTA) and the Uruguay Round trade agreement that created the WTO have increased U.S. national income by $40 billion to $60 billion a year.  In addition, the lower prices for imported goods generated by these two agreements mean that the average American family of four has gained between $1,000 and $1,300 in spending power — an impressive tax cut, indeed. 

   

  When Trade Promotion Authority (TPA) lapsed in 1994, the international trade agenda lost momentum.  The Uruguay Round was implemented, but no new round of global trade negotiations was launched as the 1990s wore on.  Moreover, the United States was compelled to sit on the sidelines while other countries and trade blocs negotiated numerous preferential trade agreements that put American companies at a competitive disadvantage. 

   

  As the Chamber pointed out during its 2001-2002 advocacy campaign for approval of TPA, the United States was party to just three of the roughly 150 FTAs in force between nations at that time.  Since then, the United States has approved FTAs with an additional dozen countries, and they are bringing substantial economic benefits.  Today, just under half (43%) of American exports go to markets where they enter duty free thanks to these FTAs.  Only a third of U.S. exports enjoyed this advantage back in 1994, the year NAFTA came into force.  With sales to our newest FTA partners growing twice as fast as U.S. export growth to the rest of the world; it’s no surprise that U.S. exporters are enjoying robust growth. 

   

   

  Free Trade Agreements

   

  As noted above, the United States is an extraordinarily open economy.  Consider how U.S. tariffs compare with those of countries where FTA negotiations have recently been concluded or are underway.  According to the World Bank, the United States has a weighted average tariff rate of less than 2%.  By contrast, the weighted average tariff on U.S. manufactured goods falls in the 10-11% range in Colombia, Korea, and Peru.

   

  An academic observer may regard the price disadvantage that falls to U.S. companies from these lopsided tariffs as insignificant.  However, business men and women face narrower margins than these every day, very often with the success or failure of their firm on the line, so these tariffs can prove decisive.  Best of all, a free trade agreement can fix this imbalance once and for all.

   

  The way FTAs level the playing field for U.S. workers, farmers, and business is borne out in the results attained by America’s FTAs.  For example, the U.S.-Chile FTA was implemented on January 1, 2004, and immediately began to pay dividends for American businesses and farmers.  U.S. exports to Chile surged by 33% in 2004, and by a blistering 85% in 2005.  In fact, U.S. exports to Chile nearly doubled in the first two years of the agreement’s implementation.

   

  Other recent FTAs have borne similar fruits.  Trade with Jordan has risen four-fold since the U.S.-Jordan FTA was signed in 2000, fostering the creation of tens of thousands of jobs in a country that is a close ally of the United States.  The U.S. trade surplus with Singapore nearly quadrupled over the first two years of implementation of the U.S.-Singapore FTA (2004-2005).  And over the 12 years since implementation of the North American Free Trade Agreement (NAFTA), by far the largest and most important of these agreements, U.S. exports to Canada and Mexico have surged by well over $200 billion (to a total of approximately $375 billion in 2006), sustaining literally millions of new jobs and businesses.

   

  One of the most compelling rationales for these FTAs is the benefit they afford America’s smaller companies.  The following table reveals how America’s small and medium-sized companies are leading the charge into foreign markets, accounting for more than three-quarters of exporting firms to these three selected markets (one a market where an FTA was recently approved, the second where FTA negotiations were recently concluded, and the third where an FTA has just been proposed).  As a corollary, it suggests how smaller businesses stand to gain disproportionately from the market-opening measures of a FTA:

  
  

   

  Market	No. of U.S. companies exporting to the market	No. of U.S. SMEs exporting to the market	No. of U.S. SMEs as a percentage of exporters
  DR-CAFTA countries	16,640	14,693	88%
  Peru	5,519	4,403	79%
  Korea	18,339	16,237	88%

  Source: U.S. Department of Commerce, 2004 data (latest available).

   

  Beyond the highly successful track record of America’s FTAs as measured in terms of new commerce, the Chamber and its members also support FTAs because they promote the rule of law in emerging markets around the globe.  This is accomplished through the creation of a more transparent rules-based business environment.  For example, FTAs include provisions to guarantee transparency in government procurement, with competitive bidding for contracts and extensive information made available on the Internet — not just to well-connected insiders. 

   

  FTAs also create a level playing field in the regulatory environment for services, including telecoms, insurance, and express shipments. In addition, recent FTAs have strengthened legal protections for intellectual property rights in the region, as well as the actual enforcement of these rights. 

   

  Following are observations on some of the trade agreements that have been in the headlines lately:

   

  Peru, Colombia, Panama:  Negotiations for the Peru Trade Promotion Agreement were concluded in December 2005, and a similar agreement was reached with Colombia a few months later.  In December 2006, the U.S. and Panamanian governments announced they had completed negotiations on a Trade Promotion Agreement “with the understanding that it is subject to further discussions regarding labor,” according to the Office of the U.S. Trade Representative.

   

  U.S. trade with Peru, Colombia, and Panama has nearly doubled since 2000, and U.S. commerce with the three countries last year totaled $8 billion, $15 billion, and $3 billion, respectively.  These are ambitious and comprehensive agreements.  Eighty percent of U.S. consumer and industrial products and a majority of the most competitive U.S. farm exports will enter these markets duty-free immediately upon implementation of the agreements.

   

  U.S. investors in these countries also regard the Trade Promotion Agreements as a helping hand for close allies.  As described above, the agreements will lend support for the rule of law, investor protections, internationally recognized workers’ rights, and transparency and accountability in business and government. 

  The agreements’ strong intellectual property and related enforcement provisions against trafficking in counterfeit or pirated products will help combat organized crime.  The agreements will promote economic growth, lending strength to the regional economy and providing local citizens with long-term alternatives to narcotics trafficking or illegal migration.

   

  The Chamber is serving as Secretariat of the Latin America Trade Coalition, a broad-based group of U.S. companies, farmers, and business organizations advocating for approval of the three Trade Promotion Agreements.    

   

  Korea:  The Chamber also strongly supports the recently concluded U.S.-Korea FTA, which is the most commercially significant FTA the United States has entered into since NAFTA.  In 2006, Korea was the United States’ seventh-largest U.S. trading partner, seventh-largest export market, and its sixth-largest agricultural market overseas.  U.S. goods exports to Korea totaled $32.5 billion last year, an increase of 17 percent over the previous year, and U.S. services exports to Korea reached $10.2 billion in 2005.  The United States is the largest investor in Korea and is Korea’s second-largest market.

   

  While we look forward to reviewing the text of the U.S.-Korea FTA as it becomes available, we have been briefed on its substance and believe that the agreement achieves most of the business community’s key objectives.  Under the agreement, 95 percent of trade in consumer and industrial products and more than half of current U.S. agricultural exports to Korea will become duty free upon implementation of the agreement.  This agreement will eliminate significant non-tariff market access barriers in Korea to U.S. goods, services, and investment, and it includes robust provisions on transparency, intellectual property rights, competition, and other rules that will protect U.S. interests.  Moreover, the agreement would also strengthen the important political relationship and alliance between the United States and Korea, further contributing to security and stability in the Asia-Pacific region. 

   

  The Chamber-administered U.S.-Korea Business Council is serving as Secretariat of the U.S.-Korea FTA Business Coalition.  This coalition already embraces over 200 leading U.S. companies and business associations that strongly support the conclusion and passage of a U.S.-Korea FTA to advance the interests of the U.S. business community and promote further bilateral trade and investment.

   

  Malaysia:  When U.S. and Malaysian officials announced in March 2006 that the two countries would undertake negotiations for a FTA, the initiative won immediate broad support. Malaysia is the largest U.S. trading partner in Southeast Asia and the 10th largest U.S. trading partner in the world.  Two-way trade between the countries in 2005 surpassed $44 billion.  The United States is Malaysia’s largest export market, purchasing more than 20% of Malaysia’s exports, and the sum of U.S. direct investments in Malaysia surpasses that of any other country.  Unfortunately, this agreement will not be concluded under the current Trade Promotion Authority (TPA).

   

   

  The Doha Development Agenda

   

  While the FTAs the United States has negotiated represent an ambitious and comprehensive way to open markets one country or region at a time, the Doha Development Agenda (DDA) — the global trade negotiations currently being conducted under the aegis of the World Trade Organization — offers the remarkably broad opportunity to lower barriers to trade globally.  By leveraging both the breadth of the DDA and the depth of FTAs, U.S. business can attain important new market opportunities in the years ahead.

   

  In essence, the DDA represents a unique opportunity to unlock the world’s economic potential and inject new vibrancy in the global trading system by reducing barriers to trade and investment throughout the world.  The round was launched on the premise that both developed and developing nations alike share in the economic gains resulting from global trade liberalization, particularly by addressing unfinished business in the agricultural sector. 

   

  Ambition is the key to the DDA’s success.  As one of the most open economies in the world, the United States must be ambitious in its approach to liberalization of trade in manufactured goods, services, and agricultural products if we are to convince our more reluctant trading partners to share our goals.  Of course, we cannot lead alone.  The European Union and the G20, in particular, need to demonstrate that they, too, are committed to the success of the DDA and willing to make the concessions necessary for a balanced result that can win the support of all WTO member countries. 

   

  The Chamber and its member companies are working with the Administration, Congress, and their counterparts around the world to ensure that the negotiations advance.  On October 25, 2005, the Chamber, in partnership with other leading U.S. business organizations and a broad range of companies and agricultural groups, launched the American Business Coalition for Doha (ABC Doha) to ensure that the U.S. private sector is coordinated, mobilized, and focused on achieving success in the DDA.  The recommendations that follow represent the Chamber’s priorities for the DDA, and we will be working actively with our trading partners around the world in the weeks and months ahead to build support for the objectives set out below.

   

  Trade in Agricultural Products:  In 2001, the WTO member countries committed to making “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support.”  We are encouraged that last fall’s proposals set forth by the United States and the G20 seem to have re-energized negotiations with respect to agricultural reforms.  We hope these advances will stem what we had perceived before the 6^th WTO ministerial conference in Hong Kong last December to be an emerging lack of ambition on the part of some key parties to the negotiations.  

   

  In a World Bank paper, Kym Anderson concludes that 92% of developing countries’ gains in agricultural trade will come from reductions in market access barriers.  The paper finds that such tariff reductions will not only improve the trade climate between developed and developing nations, but more importantly will yield significant gains in trade among and between developing countries.  This outcome mirrors what we have witnessed in improved market access provisions in the areas of manufactured goods and services — the most robust gains are seen in trade among and between developing nations.

   

  The United States is uniquely positioned to press for success based on the highest levels of ambition.  Bold positions can help break what appears to be a stalemate between developed and developing countries over who should make the first move.  We cannot fail to deliver steep reductions in both trade-distorting domestic supports and tariff rates.  In the end, success will only be achieved through mutual recognition that comprehensive trade liberalization is an opportunity that will yield enormous benefits to farmers and consumers worldwide.

   

  Trade in Manufactured Goods:  Manufactured goods represent 75% of global merchandise trade, and the manufacturing sector is a strong driver of U.S. economic growth and employment.  In 2001, the WTO member countries made a commitment “to reduce or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries.”  While some progress has been made toward this goal, much work remains to be done in the non-agricultural market access (NAMA) negotiations.

   

  In order to deliver on its development promises, the DDA must provide genuine new market access by substantially reducing or eliminating tariffs among, at minimum, the developed and developing countries through a formula that focuses on making meaningful reductions in tariffs across all product segments, particularly peak and high tariffs.  A final agreement must also allow for a voluntary sectoral approach to tariff elimination.  Above all, achieving a “level playing field” requires an approach that recognizes the current differences among countries’ tariffs, and mandates reductions in tariffs that will reduce and eliminate those differences, so as to avoid an outcome where countries with high average tariffs are only required to make relatively small reductions.

   

  While tariff elimination is a critical component of the round, non-tariff barriers are increasingly becoming as important, if not more important, as tariffs in constraining global trade.  The DDA should focus on removing these hindrances to international trade, using both horizontal and sectoral approaches.  In addition, the WTO should strengthen, or create where necessary, problem-solving mechanisms specifically focused on addressing and removing non-tariff barriers.

   

   

  In order to ensure that the NAMA negotiations lead to substantially increased opportunities for trade, growth, and development for all countries, flexibilities should be built into the process that can provide some room for less developed and small economies to take part without shouldering the same burden as their more developed counterparts.

   

  Finally, the Chamber recognizes that the NAMA negotiations are impacted by progress in the broader negotiating environment.  It is important that negotiations on agriculture, services, and NAMA move forward on parallel tracks to ensure that success in the broader round is achieved.

   

  Trade in Services:  The services sector is the backbone of the economy in developed and developing countries alike.  In total, it represents about two-thirds of world GDP, or $35 trillion in 2004.  Further liberalization of this critical sector will allow WTO member countries to attract greater foreign direct investment and take full advantage of the growth and employment that this vital sector provides.

   

  In 2001, the services liberalization work that had been conducted under the General Agreement on Trade in Services (GATS) was incorporated into the DDA mandate.  WTO members endorsed the existing negotiating modalities and set a schedule for successive market access requests and offers.  Progress has been unsatisfactory to date: few offers and even fewer revised offers have been tabled, despite the fact that the May 2005 deadline is long passed.  While new methods that hold promise are being explored to revitalize the process, the objective of achieving substantial new liberalization commitments within the next few months should guide U.S. efforts.

   

  In mode one (cross border supply of services), the U.S. should seek full market access and most-favored nation (MFN) treatment for all cross border services trade.  This level of ambition should apply for mode two (consumption of services abroad) as well.  In mode three (commercial presence), the U.S. should seek the abolition or, at the very least, substantial easing in equity limits for services investments and allow for the incorporation of services businesses in whatever legal form makes the most business sense.  In mode four (temporary movement of professionals), countries should commit to screen temporary workers, ensure they will leave when their visas expire, and generally commit to containing illegal migration in return for their professionals’ access to host countries.

   

  Trade Facilitation:  The Doha Declaration recognizes the case for “further expediting the movement, release and clearance of goods, including goods in transit, and the need for enhanced technical assistance and capacity building in this area.”  Trade facilitation initiatives provide significant opportunities to achieve real, nuts-and-bolts improvements for businesses of all sizes.  Progress in such areas as port efficiency, customs procedures and requirements, the overall regulatory environment, and automation and e-business usage are important for all companies but are especially valuable to smaller and medium-sized enterprises. 

   

  Major world regions are already embracing trade facilitation.  In 2002, the 21 member economies of the Asia-Pacific Economic Cooperation (APEC) forum launched a Trade Facilitation Action Plan that included a commitment to reduce trade-related transaction costs by five percent within six years.  In November 2004, the APEC leaders were proud to announce that they had reached their goal three years ahead of schedule.  And in the Western Hemisphere, the countries negotiating the Free Trade Area of the Americas committed in 1999 to implement a package of nine customs-related “business facilitation” measures that covered much of the same ground as the APEC action plan.   In November 2005, a group of over 100 of the Western Hemisphere’s leading business organizations released a declaration favoring an ambitious stance in the trade facilitation negotiating group of the DDA.

   

  These efforts have served to raise the profile of trade facilitation as an opportunity for the DDA, but much more can be done.  Trade facilitation can bring great benefits if adopted unilaterally, but a global rules-based approach also offers the advantages of certainty, stability, and enhanced commonality to customs measures and port administration.  This is the promise of the DDA’s trade facilitation negotiations.

   

  Trade, Labor and Workforce Development

   

  The opportunities trade presents are clear, but there are challenges as well.  In recent years, Congress has engaged in a dialogue about how to ensure that U.S. workers and workers in developing countries can benefit from increased trade and investment flows.  The U.S. business community encourages these discussions as well as efforts to provide American workers with the tools they need to raise their productivity.  The Chamber welcomes new ideas on ways to improve Trade Adjustment Assistance programs, and hopes that Congress will also consider new programs that will assist American workers in remaining competitive and highly productive. 

   

  In addition to the benefits for the United States, there is powerful evidence that deepening economic ties with developing countries promotes their growth, fosters job creation, and promotes improvements in worker conditions in markets where American companies are active and engaged.  Numerous studies show that American companies operating in foreign markets lead the way in driving improvements in working conditions and act as stellar examples of responsible corporate citizens.  U.S. companies promote ethical and responsible business behavior, market-oriented business practices, and respect for the rule of law.  They also operate under high environmental, health and safety standards in developing country markets, and they encourage local suppliers to adopt and adhere to similar practices. Compared to employees in local companies, employees in U.S. companies enjoy competitive to superior compensation, benefits, and training. 

   

   

   

  The Chamber is hopeful that Congressional discussions with the Administration on trade and labor will reflect the goals we all share for promoting working conditions and creating jobs in developing countries. The Chamber is optimistic that Congress will develop a way forward on trade legislation that will enable the U.S. to continue to pursue an active and engaged trade policy, opening markets to U.S. goods, services, and agricultural products.  The U.S. business community stands ready to support those discussions on the way forward, and we want to work in partnership with Congress and the Administration in developing substantive, comprehensive strategies that will bolster America’s competitiveness and improve America’s workforce.

   

  Conclusion

   

  The Chamber believes that trade expansion is an essential ingredient in any recipe for economic success in the 21st century.  To make the case more clearly, the Chamber recently issued a landmark report entitled Global Engagement: How Americans Can Win and Prosper in the Worldwide Economy.  It maps out the benefits of trade — as well as challenges to America’s ability to compete that have been laid bare by globalization. 

   

  The Chamber also recently published Impact of Trade, which lays out in the clearest fashion possible the benefits that the 50 states of the union are already deriving from international commerce. The Chamber is pleased to present these documents for the record, and they are available on our website (www.uschamber.com) as well.

   

  If U.S. companies, workers, and consumers are to thrive amidst rising competition, new trade agreements such as the DDA and the various FTAs cited above will be critical.  In the end, U.S. business is quite capable of competing and winning against anyone in the world when markets are open and the playing field is level. 

   

  Mr. Chairman, Mr. Ranking Member, Members of the Committee, we greatly appreciated the opportunity to testify today before Senate Commerce Subcommittee on Interstate Commerce, Trade and Tourism to provide testimony on the critical importance of  advancing the U.S. international trade agenda.  The Chamber stands ready to work with you on these and other challenges in the year ahead.  Thank you very much.

• Mr. Edward Gresser

  Director

  Trade and Global Markets Project, Progressive Policy Institute
  Download Testimony (47.94 KB)

  Read statement

  Testimony

  Mr. Edward Gresser

  
  

• Mr. John Johnston

  Partner

  Modern Metal Cutting, LLC
  Read statement

  Testimony

  Mr. John Johnston

  Testimony of John Johnston

  Partner, Modern Metal Cutting, LLC

  Before the Subcommittee on Commerce, Trade, and Tourism

  Committee on Commerce, Science and Transportation

  United States Senate

  April 18, 2007

   

   

  Good morning, Mr. Chairman and Members of the Committee, and thank you for the opportunity to testify on the vital question “Is ‘Free Trade’ Working?” The short answer is “no” and I’ll explain why in a minute.

   

  My name is John Johnston, and I have been involved in manufacturing in Ohio for 16 years.  Two years ago, I helped to found a new metal services venture called Modern Metal Cutting, which offers our customers precision cutting and machining of tubes and other metal shapes.

   

  I have also been active in several regional and national manufacturing organizations. Since 1997, I have been a Board member of the Summit County Machine Shop Group, an Akron-area organization of small companies in the precision metal-working sector. These firms, generally family-held for generations, specialize in quickly turning around constantly changing small orders of highly customized parts and components of larger industrial products.  From 2001 to 2006, I served as the organization’s president.

   

  In addition, I sit on the Steering Committee of the Northeast Ohio Campaign for American Manufacturing or NEOCAM.  NEOCAM is a regional coalition formed to promote awareness of domestic manufacturing’s importance, and to improve its competitiveness. Northeast Ohio has been hit especially hard over the last two decades by trade policies that allow our foreign competitors to take advantage of unfair government programs designed to boost manufacturing – and our government does nothing in response.  Anyone who makes the short ride into downtown Cleveland from the airport – and sees the abandoned factories – knows something went very wrong in Northeast Ohio – and the rest of the industrial heartland.

   

  In recent years I have been pleased to work with the U.S. Business and Industry Council. This national business organization is composed of 1,500 member companies that are mainly smaller, family-held domestic manufacturers.  For decades, its Washington advocacy efforts have focused on ensuring that national-level domestic and international policies preserve and strengthen industry in the United States.  They supply the national and international political perspective that is often lacking in our local organizations.

   

  In sum, I have been committed to strengthening manufacturing in my home region and state, and in the nation at large, all my adult life.  I want to believe strongly in its future.  In fact, I’ve got my money on it.  But I also want to make very clear that my commitment – and those of thousands of other manufacturers like me – alone is not enough.  No matter how hard we try, we can’t win in a policy environment stacked against us.  Our efforts can still be defeated by unwise federal policies – especially unwise trade policies.           

   

  Because I have been very deeply involved in sales and marketing, I have visited companies throughout the Midwest.  I know firsthand that in the globalized American economy many of these firms have had to continually reinvent themselves with new technologies, new management techniques and new business models.  Many of these dynamic businesses have been very successful; others have not.

   

  My hometown and region also understand that local and state government policies can be crucial to the health of their manufacturing bases.  Our recent economic difficulties have sparked a major burst of community development initiatives and coalition-building involving business, the public sector, and the non-profit sector. Manufacturers in Ohio, and particularly northern Ohio, know that they need to be proactive doers and big-picture thinkers.  We are not sitting around idly waiting for protection.

   

  Nevertheless, our efforts must be complemented with major changes at the federal level, and nothing is more essential than an overhaul of Washington’s approach to a broad range of international trade-related issues.  The U.S. role in the global economy is Washington’s responsibility – especially because we live in a world in which foreign governments fight hard for the interests of their businesses and have no reluctance to use all the resources and influence at their disposal to get this job done.  Indeed, under the Constitution, the right to regulate foreign commerce rests with the Congress.  Thank you for taking that responsibility seriously at this Committee.

   

  The needed overhaul of U.S. trade policy has to reflect the interests of domestic businesses, which are too often absent from policy deliberations in Washington, DC.  If new U.S. trade policies don’t actually change trade flows by changing the conditions companies like mine face both at home and abroad, they won’t bring us a dime’s worth of new business, they won’t create or preserve a single new American job, and they won’t raise the wages or benefits of a single American worker. 

   

  Has “free trade” worked for Ohio and for Ohio manufacturing?  It’s impossible to look at my state’s economy and say “Yes.” The latest Census data tell us that, as of 2004, Ohio was the nation’s third largest producer of goods.  But in the seven years prior to 2004, goods production in our manufacturing-heavy state dropped nearly nine percent in real terms – the worst performance in the country and the fourth worst in percentage terms.

   

  Between 1997 and 2006, Ohio lost more than 22 percent of its total manufacturing jobs and nearly 25 percent of its jobs in durable goods industries. The latter still account for nearly 70 percent of the state’s manufacturing employment, and they pay among the state’s best wages – as they do nation-wide.  That’s surely why wages in the state’s goods-producing sector overall – which paid more than 24 percent better than the service sector according to the latest figures –  fell 15.7 percent from 1997 to 2005 – the worst performance in America. 

   

  Why do I blame ineffective U.S. trade policies? Clearly, they’re not the only factor. But I look at the recent trade performance of some of the manufacturing sectors that are among Ohio’s biggest, and it’s difficult to ignore the very strong connection. For example, between 1997 and last year, the U.S. trade deficit for durable goods industries increased by nearly 260 percent. In transportation equipment, it grew by nearly 155 percent.  In fabricated metals – my sector – it exploded by more than a factor of 10.  In non-electrical machinery, America ran a surplus of $14.4 billion in 1997. By last year, that had turned into a deficit of $11.9 billion.

   

  The net effect of these figures means fewer opportunities for sales abroad and often reduced sales at home. An even clearer picture of the damage comes from research on import penetration in U.S. manufacturing industries that has been published in recent years by the U.S. Business and Industry Council.  Import penetration is an economist’s way of saying how much of the U.S. home market is being taken away from domestic manufacturers and captured by foreign imports.

   

  The Council has looked at how much of the U.S. market has been won by imports over the last 10 years in over 100 categories.  It’s not a pretty picture.

   

  An astonishing 96 percent of these sectors – which are all capital- and technology-intensive industries – lost U.S. market share to imports during this period.  That’s the market they’re supposed to know best.  That’s the market where they face no trade barriers.  In literally dozens of cases, import penetration at least doubled.  In dozens of cases, moreover, imports now control more than half of the U.S. market.  Among the biggest so-called “loser industries” are sectors such as aircraft engines and parts, machine tools of all kinds, and power generation equipment.

   

  These sectors represent the heart of the industrial economy of any high-income country in the 21^st century.  They generate disproportionately large gains in productivity, and technological advance.  They employ most of our country’s knowledge workers.  And they, of course, pay the best wages in the entire economy.  A country that loses its dominance in these industries is like an athletic team that sits back and watches its star players bought by rival teams willing to offer better packages and conditions.  The U.S. is also going to be a country that will face major struggles to remain an economic and military superpower.

   

  These points describe some of the microeconomic problems caused by our trade policies. But we should not forget the macroeconomic threats. As a businessman, I can’t help but be worried by the American economy’s rapid accumulation of titanic debts – so much of them resulting from decades of buying from the rest of the world much more than we sell.

   

  I have a hard time believing that the rest of the world is going to continue funding our over-consumption – especially as we become ever less creditworthy, at least by normal financial standards.  I would feel a lot better about the prospects for my business and my industry – and the nation at large – if I didn’t know that the dollar could easily collapse if just a few foreign central banks started hedging their bets and reducing their dollar holdings.

   

  I really hope that we can avoid the kind of worldwide economic meltdown that would result. Like most of you I suspect, I am puzzled as to how long the nation can keep tempting fate.  

   

  I also keep hearing and reading that I shouldn’t be concerned about the loss of U.S. manufacturing jobs because it’s a sign of soaring productivity. I don’t see any correlation between productivity gains and the loss of factories and jobs.  Some of our best-run companies are now starting to disappear.

   

  And as a businessman, I find myself wondering exactly who is going to buy most of the products that the world’s factories keep turning out, if not the American consumer? Unless we keep going deeper into debt, how can we as a nation keep up the pace if high-paying manufacturing jobs keep getting replaced by much lower-paying service jobs?

   

  Are the American customers for the products I help make really going to be replaced by Chinese or Indian customers – on anything close to a one-for-one basis? And if so, with trade deficits continually rising at this point, how long is this going to take?

   

  But how exactly has trade policy contributed to these problems? I’d like to focus on two features of this policy.  First, as I indicated before, foreign governments intervene in trade flows all the time, in countless ways.  They erect tariff and non-tariff barriers to protect their own industries.  They heavily subsidize producers on their home soil, including with Value-Added Tax rebates on exports that have grown in recent decades as tariffs have been cut. They manipulate their exchange rates.  They steal intellectual property.  And they dump product in our market at below the cost of production in their home market.

   

  What’s most important to understand, however, is that our trade problems are not limited to one high-profile sector – like steel.  And they aren’t limited to one problem country – like China. Increasingly, these practices represent the way business is done all around the world, throughout the manufacturing sector, with one major exception – the United States.  And what our trade policy has done for way too long has been to open our market wide to producers enjoying these advantages – which of course include multinational companies that produce overseas – and then tell our domestic firms, which manufacture and create economic benefits here: “You’re on your own. Lots of luck.”

   

  Second, recent Presidents and their trade negotiators keep picking the wrong target countries to sign trade deals with, at least from the standpoint of strengthening manufacturing at home.  Just think of the countries and regions that have dominated U.S. trade diplomacy for nearly 20 years – where we’ve signed the most deals.  Mexico. China. The Caribbean Basin. Central America. Sub-Saharan Africa.  Jordan. And more recently, Panama, Colombia, and Peru.  Even the current Doha Round of world trade talks aims explicitly at delivering most of the benefits of expanded, freed-up trade to developing countries.

   

  Signing trade deals with these countries and regions may be justified – if the main purpose of trade policy is to create new opportunities for foreign workers and companies.  Or if the main purpose is bolstering U.S. national security and fighting global terrorism by aiding populations that might be receptive to the pitch of violent extremists.  (Incidentally, both of the above assumptions are open to serious questioning.)  However, if the central goals of U.S. trade policy are creating more export opportunities for domestic companies and raising the standard of living of their employees, then our aim is completely cockeyed.

   

  In fact, one of my own Senators, Sherrod Brown, has come up with the most convincing explanation for this set of trade deal targets.  As he points out in the case of China, when American multinational companies look at the People’s Republic, they don’t mainly see a billion potential new customers. They see a billion potential new workers.  And by extension, the main markets that the U.S. multinationals want to export product to are not abroad. They’re at home. 

   

  So I agree with those who argue that it’s completely misleading even to describe most recent trade agreements as free trade agreements – because the aim can’t be to create sustainable two-way flows of business.  Our target countries are either too small or too poor or too deeply in debt or too protectionist and export-oriented to become big new consumers of American-made products for the foreseeable future. 

   

  But they have tremendous capability and potential to supply the U.S. market – especially when our multinational companies provide them with the world’s most advanced production technologies and equally advanced management techniques.  As a result, it’s best to describe these deals as outsourcing or offshoring agreements. Their main purpose is not to expand the worldwide sales of domestic American producers.  Instead, it’s to help multinational companies serve the U.S. market from very low-cost, regulation-free production platforms abroad.

   

  Trade deals such as these – signed with regions with vastly more export than import potential – can’t help but tremendously boost the U.S. trade deficit.  And they can’t help but place domestic producers under ever more pressure – pressure that often has little or nothing to do with free market forces – much less “free trade.”

   

  What should Congress do about this? I worded this question deliberately – because the ball is squarely in Congress’ court.  After more than six years under the current administration, it is clear that the White House thinks that “more of the same” trade policies will somehow produce different results.  Thus the Administration can’t be counted on to be part of the solution.

   

  As a result, it’s gratifying to see so many Senators and Members of Congress these days vigorously discussing the need to make big changes in U.S. trade policy. I am very pleased, Mr. Chairman, that you have introduced legislation to bring our imports and exports into line with an auction quota system – an ambitious, sweeping plan that acknowledges implicitly that piecemeal solutions to these trade problems will never suffice.  I was also very pleased by the emphasis that the Senate and House Democratic freshmen have recently placed on new trade policies that reflect the needs of domestic businesses.

   

  Enhancing worker rights and environmental protections around the globe are worthy and appropriate objectives for trade policy.  Mr. Chairman, your leadership on these issues is greatly appreciated.   It is important that the Congress hold firm in current negotiations with the Bush Administration requiring strong and enforceable protections for workers and for the environment in new trade agreements.    

   

  Yet from the perspective of domestic companies and industries --  the ones that actually generate jobs and wealth and income here at home --  these issues cannot be the main focus of changing current trade policy. Leveling the playing field for companies such as mine by changing the trade flows so that we turn the corner and begin to eliminate the trade deficit needs to be the central policy objective.  

   

  What else is needed to assist the domestic manufacturers – and service providers and farmers and ranchers – that make up the vital productive side of our economy?

   

  It’s obvious that the first step is to stop doing harm. The trade agreements that the United States negotiates and signs no longer promote more production and employment at home than they send abroad.  We as a nation urgently need to figure out how to do trade policy right again. As a result, I recommend that there be a moratorium on all new trade agreements until major, pro-domestic producer and worker trade strategies are identified and put in place.  Congress might consider appointing a broad-based national commission to carry out this mission.    

   

  For similar reasons, Congress should reject new Fast Track authority for the Executive – until we have in place trade policies that stop the hemorrhaging of manufacturing plants, R&D facilities, and the high-paying/good benefit jobs associated with them.  Nationally, since 2001, we have lost more than three million manufacturing jobs.  Stemming this erosion of jobs, skills, and our industrial base ought to be the first objective of any new national trade policy.

   

  In addition, Congress should:

   

  – Swiftly pass the Ryan-Hunter currency manipulation bill – which already enjoys wide, bipartisan support.  This legislation would allow trade remedy law action against foreign government manipulation of currency that is designed to keep their values artificially low.

   

  – Address the unfair advantage caused by the rebate of VAT taxes by over 150 of our trading partners.  To do so, Congress must pass a border equalization tax.  This tax would apply to foreign goods from VAT countries coming into our market.  They would be taxed at the same amount as the rebate they received upon leaving the foreign country. We should then use the proceeds to pay the VAT tax faced by American exports entering foreign markets. This step would go far toward creating a fair and level playing field for U.S. goods and services.

   

  – Institute major legislation to begin to reduce the trade deficit.  The approach could be an import quota and auction system as recommended by Chairman Dorgan or it could be a trade-balancing, temporary import surcharge as proposed by Rep. Mike Michaud.  These approaches, both of which could be designed to be consistent with WTO rules, would rapidly get the trade deficit under control.  In addition, they would save the world trade system as a whole, which is dangerously out of balance today.  Countries cannot get rich by exporting over-production to the Untied States indefinitely.

   

  Many other things need to be done, not only in trade policy, but in related tax and regulatory policies. These measures that I have just highlighted, however, represent an essential starting point. Their passage would put the Congress strongly on record in support of a program that supports domestic manufacturers and their employees.

   

  If these measurers were turned into U.S. policy, they would go a long way to allowing domestic businesses the chance to compete on a fair and equal basis with their foreign counterparts.

   

  Thank you for your consideration of my views.  I look forward to answering any questions that you might have.