Statement of Samuel L. Maury, President, Business Roundtable

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on Free Trade Deals:  Is the United States Losing Ground
as its Trading Partners Move Ahead?

March 29, 2001

Mr. Chairman, Members of the Subcommittee.

Good morning. My name is Sam Maury. I am the President of The Business Roundtable, an association of chief executive officers of leading U.S. corporations with a combined workforce of more than 10 million employees in the United States.

I want to thank you for providing me and The Business Roundtable with the opportunity to share our views on the recent proliferation of bilateral and regional trade agreements that exclude the United States.

Mr. Chairman, the world has entered a New Era in international trade and investment policy, an Era in which our trading partners no longer consider the United States an indispensable party to market opening agreements. One defining feature of this New Era is the proliferation of bilateral and regional free trade agreements (FTAs) that grant parties preferences over non-parties. The United States is a party to only two of the over 130 estimated FTAs in force today. As a result, the vast majority of FTAs grant our trading partners preferences at our expense. Our failure to keep pace has both immediate and long-term implications for the health of the U.S. economy. Not only do FTAs that exclude the United States make it difficult for U.S. businesses, workers and farmers to compete today, they also diminish our ability to negotiate forcefully in the future, especially in the World Trade Organization (WTO).

In this New Era, standing still means falling behind. The United States must move forward by re-engaging immediately and aggressively in trade and investment negotiations. Giving the President Trade Promotion Authority would enable the United States to retake its leadership role, and signal to our trading partners our commitment to reinvigorate the WTO and the Free Trade Area of the Americas (FTAA) negotiations, to move forward with the Singapore and Chile FTA negotiations, and to launch new initiatives.

I. THE NEW ERA IN INTERNATIONAL TRADE AND INVESTMENT POLICY

The world has entered a New Era in international trade and investment policy. In the past ten years, our trading partners have become hyperactive, rewriting trade and investment rules and reshaping international economic relations. Our trading partners no longer consider the United States an indispensable party to trade and investment negotiations. They are cutting deals without us, gradually surrounding the United States with a network of preferential trade arrangements.

When the New Era began, the United States kept pace with its partners. We negotiated the North American Free Trade Agreement (1994), promoted ambitious market-opening initiatives in the APEC, such as the Information Technology Agreement (1996), and negotiated telecommunications and financial services deals in the WTO (1997). After a pause of several years, we have started to get back into the game with the U.S.-Jordan FTA and the proposed FTA negotiations with Chile and Singapore. However, unable to agree domestically on an agenda for the next round of WTO talks or on comprehensive regional objectives in the FTAA negotiations, we run the risk of falling further behind.

A. Free Trade Agreements

Approximately 130 FTAs have been notified to the WTO (or its predecessor, the GATT) and are in force around the world today, most of which were concluded since 1990. Only two--the U.S.-Israel FTA and the NAFTA--include the United States. (The U.S.-Jordan FTA is not yet in force.) The actual number of FTAs may be even greater, as not all FTAs are notified to the WTO. In many instances, these FTAs are less comprehensive than U.S. FTAs. Nevertheless, they pose a considerable challenge to U.S. policymakers.

The European Union. About 33 percent of total world exports in 1999 were covered by EU free trade and customs agreements, compared to almost 11 percent for U.S. free trade accords. The EU has in force FTAs with 27 countries--20 of these have been signed since 1990. Last year alone it reached agreements with South Africa, Morocco and, most significantly, Mexico--the United States' second largest export market. Agreements with Egypt and Jordan have been signed but are not yet in force.

The EU has 15 more FTAs on its active negotiating agenda--including FTAs with the four nations that comprise MERCOSUR, with the six countries of the Gulf Cooperation Council (Saudi Arabia, Oman, Kuwait, Qatar, UAE and Bahrain), and with Chile.

MERCOSUR. Argentina, Brazil, Paraguay and Uruguay formed MERCOSUR in 1991. MERCOSUR began its first round of FTA negotiations with the EU in April of 2000. In September of 2000, MERCOSUR agreed to establish by 2002 a trade union with the Andean Community. (The Andean Community comprises Peru, Venezuela, Colombia, Ecuador, and Bolivia.) At the end of 2000, MERCOSUR invited Mexico to join its bloc by 2004.

ASEAN. The Association of Southeast Asian Nations began to form an FTA in 1992. (ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam.) In November 2000, ASEAN began considering an FTA with China. Some consideration is also being given to a massive East Asian FTA between ASEAN, China, Japan and Korea.

Mexico. Mexico has FTAs with at least 28 countries; 25 agreements were concluded since 1994. In addition to NAFTA and its agreement with the EU, Mexico has agreements with Bolivia, Chile, Venezuela, Colombia, Costa Rica, Nicaragua and Israel. It is presently negotiating FTAs with MERCOSUR, Japan, South Korea and Singapore. In November 2000, Mexico reached an agreement with EFTA (Iceland, Liechtenstein, Norway and Switzerland). According to Mexican President Vicente Fox, "The fact that we belong to [NAFTA] does not impede us from reaching bilateral and regional accords. … Brazil, the MERCOSUR, and Latin America are our priorities."

South Africa. In addition to concluding an FTA with the EU, South Africa is the leader of the Southern Africa Development Community (SADC), an FTA among 12 South African countries. In December 2000, SADC and MERCOSUR agreed to pursue closer trade and economic ties.

Japan. Following a long-standing policy of refusing to sign bilateral and regional FTAs, Japan in the past two years has decided to give serious consideration to several significant FTAs. Japan hopes to conclude a comprehensive agreement with Singapore by the end of this year. Japan is also holding informal discussions on FTAs with Mexico, Canada, South Korea, Australia and New Zealand--but not with the United States. A senior Japanese official has suggested that Japan's future may no longer be as closely tied with the United States and the WTO: "For the past several decades, Japan has been backing bilateralism and multilateralism, in which it has treated the United States as its key trade partner and GATT and the WTO as the supreme body to set global trading rules. This policy is changing as the time changes."

The United States. At present, the United States has in force FTAs with only three nations; the most recent agreement, NAFTA, entered into force in 1994--more than seven years ago. While the United States in 1998 gained acceptance from 34 Western Hemisphere nations for the general principle of moving toward hemispheric free trade in the Americas by 2005, these negotiations have stalled. The objective of free trade in APEC by 2020, agreed to in 1994, is even less advanced.

B. Bilateral Investment Treaties (BITs)

Bilateral Investment Treaties (BITs) are international agreements that essentially prevent discrimination, remove barriers and protect investments against expropriation. The nations that are most active in negotiating BITs recognize the tremendous benefits that foreign investment provides to their economies. Although a full list of these many benefits is beyond the scope of this testimony, two of the most fundamental deserve particular attention.

First, our investments and our exports are generally linked. Exports of goods by U.S. companies to their foreign affiliates total about $162 billion a year, 26 percent of all U.S. goods exports. It is easier for U.S. companies to export to foreign markets when these companies can establish a commercial presence in the foreign market. For example, a U.S. machinery manufacturer may find low tariffs on U.S. machinery meaningless if the manufacturer cannot establish a sales outlet or provide maintenance services for the exported machinery.

Second, U.S. companies' overseas operations also generate income that is reinvested in the United States. Approximately $135 billion per year is invested in the U.S. economy from this source of income. Foreign investment also allows U.S. companies to enjoy greater economies of scale and scope, as well as greater access to important foreign technologies.

The number of BITs quintupled during the 1990s, from 385 to 1,857, according to a recent report from the United Nations Conference on Trade and Developmet. The United States ranks only 26th in terms of the number of BITs concluded as of January 2000.

While the United States is party to approximately 43 BITs, Western European nations have negotiated 909 and have negotiated with the largest and most commercially significant developing countries in the world. For example, 16 Western European countries have BITs with Brazil (the largest country in Latin America), 16 with China (the largest country in Asia), 10 with India (population nearly 1 billion), and 13 with Indonesia (population over 200 million). The United States has not signed a single BIT with any of these nations.

C. Mutual Recognition Agreements (MRAs)

A Mutual Recognition Agreement (MRA) is an agreement between the parties to accept one another's (different) standards or regulatory certification systems.

The EU leads the world in the development of MRAs. While the United States concluded several MRAs with the EU in 1997 and an MRA for telecommunications equipment with members of APEC in 1998, the EU has greater experience and familiarity with MRAs. Most recently, in December 2000, it concluded an MRA with Japan, after five years of negotiations. Its dominance in this area means that European exports often can gain entry into foreign markets at a lower cost and sooner than U.S. exports.

II. THE IMPACT OF U.S. INACTION

A Presidential Report to the Congress several years ago recognized the harm that results from U.S. inaction in the New Era: "[A]ny time a trade agreement is concluded that reduces barriers among the parties, and those parties do not include the United States, U.S. producers are put at a competitive disadvantage in that market. U.S. exporters are discovering every day the real and growing commercial costs of U.S. non-participation in these ongoing trade negotiations." (Presidential Report to the Congress: Recommendations on Future Free Trade Area Negotiations, September 25, 1997).

While many of the FTAs and BITs described above are not as comprehensive as agreements to which the United States is a party, our failure to keep pace with our trading partners in this New Era nevertheless poses both an immediate and a long-term threat to U.S. businesses, workers and farmers. In the immediate future, and even today, U.S. businesses, workers and farmers are forced to compete on an uneven playing field. Longer term, our trading partners are creating rules that cut against us and are forming strategic alliances that are hostile to U.S. interests. The immediate and long-term threats take a variety of forms.

A. Discriminatory Tariffs. With the proliferation of FTAs that exclude the United States, U.S. exporters face higher tariffs than their competitors. For example, the Canada-Chile FTA eliminated Chile's across-the-board 11 percent tariff for Canada, but not for the United States. In addition, most trade between Brazil and Argentina (two members of MERCOSUR) is now duty-free, while U.S. companies still face an average tariff of more than 14 percent on exports to these countries. Unless the United States returns to the negotiating table, the situation is likely to deteriorate even further in the immediate future, as numerous proposed FTAs are concluded and enter into force.

These discriminatory tariffs harm U.S. businesses and workers every day. For example, Holland Binkley Company, an Ohio company, recently bid on supplying axles to Chile. Holland lost the bid to a Canadian company, because the Canada-Chile FTA exempted Canadian products from a tariff that U.S. manufacturers must pay. To be able to compete with Canadian companies, Holland has to use its plant in Woodstock, Canada, to export transportation products to Chile.

Henry Schein, Inc., headquartered in New York, is the world's leading distributor of healthcare products to office-based doctors and dentists. Henry Schein exports its products to over 400,000 clients around the world. But tariffs and duties as high as 100 percent place these U.S. exports beyond the means of many customers in Brazil and Argentina. MERCOSUR's preferential treatment of South American products force doctors and dentists to buy local products, even though U.S. healthcare products are widely regarded as the best in the world. Before MERCOSUR was formed, Henry Schein had much better access to these markets.

Foreign FTAs are also adversely affecting U.S. farmers. For example, according to the Washington State Potato Commission, Chile has been the largest importer in South America of U.S. frozen potato products. However, because of Chile's FTAs with Canada and MERCOSUR, Chile is phasing out its duties on Canadian and Argentine potatoes, while tariffs on U.S. potatoes are stuck at 8 percent. As a result, U.S. potato producers are losing their market share. Recently, U.S. potato exporters lost the Burger King account to Canadian and Argentine suppliers.

Finally, in your second panel today, you will hear the Mead Corporation explain how the lack of FTAs with Latin American countries has adversely affected exports from Mead and other U.S. forest and paper product companies.

B. Discriminatory Services Provisions. FTAs increasingly cover trade in services. Because many developing countries have yet to remove barriers to market access in many services sectors under the WTO's General Agreement on Trade in Services, FTAs provide fertile ground for preferences in such service areas as telecommunications, financial services, tourism, and government procurement. Our exclusion from FTAs means our service providers are placed at a competitive disadvantage against their foreign (especially European) rivals. Take, for example, the EU-Mexico FTA. The European Commission boasts that European service providers "will be granted better access than that currently enjoyed by Mexico's other preferential partners and in particular the USA and Canada." (emphasis added)

C. Unfavorable Product Standards and Regulations. Our major trading partners are actively seeking to embed their technologies in standards and regulations adopted in other countries. FTAs often provide the institutional framework for doing so. When successful, these efforts grant foreign companies a decisive competitive advantage. Their product becomes the standard, while the U.S. product becomes obsolete.

D. Discriminatory Regulatory Treatment. Like FTAs, mutual recognition agreements (MRAs) create a preferential arrangement for the parties involved. Exporters covered by MRAs not only greatly reduce their costs by eliminating duplicative investigations of their products, they also get to the foreign market first.

E. Preferential Investment Protection and Liberalization. FTAs and BITs can provide each party's investors with protection against discrimination and expropriation without compensation. They also provide for the liberalization of investment rules. For example, BITs and FTAs increasingly include provisions regarding the right to establish a commercial presence in the foreign country and the free movement of managerial employees. Thus, FTAs and BITs that do not include the United States grant our foreign competitors opportunities that U.S. companies lack. These lost opportunities harm U.S. workers because, where our investments go, our exports follow.

F. Losing the Benefit of Our Existing FTAs. Our only FTA (other than the one with Israel) is NAFTA. In many instances, other countries are diminishing our preferential relationships by negotiating similar agreements with Mexico and Canada. Indeed, that is the very purpose of some of these FTAs, including the existing EU-Mexico FTA and the proposed Japan-Mexico FTA.

The European Commission has stated that "the main objective [of the EU-Mexico FTA] has been to restore the competitiveness of EC exports to Mexico and secure equivalent access to that market, in particular with respect to that enjoyed by products originating from the NAFTA countries." For example, European cars "will enter the Mexican market under the same, and in certain cases better conditions than NAFTA cars. Tariffs will be reduced from 20% to 3.3% at entry into force and will be eliminated by 2003. Unlike in NAFTA, [European] vehicles imported by companies which are not established in Mexico will also benefit from these preferential conditions." (emphasis added)

The lesson is clear: it is no longer possible for us to rest on our past success in negotiating preferential market access. Without an ongoing commitment, those preferences will be lost, and U.S. workers, farmers and exporters will pay a price for our inaction.

G. Setting Dangerous Precedents. FTAs set precedents for future bilateral, regional, and multilateral agreements. If the United States does not participate in shaping these precedents, the United States becomes isolated when new rules are negotiated in the WTO and elsewhere. For example,

· Anti-dumping Remedies. Without U.S. involvement, FTAs may threaten the careful balance that WTO negotiators struck over antidumping remedies during the Uruguay Round. For instance, in their 1996 FTA, Canada and Chile agreed to discontinue the use of antidumping remedies with respect to one another's exports. Moreover, the Japanese Keidanren wants "the network of FTAs to disseminate fairer anti-dumping rules" in order to "strengthen Japan's position in the next WTO negotiations."

· Electronic Commerce. Our trading partners are contemplating rules on electronic commerce that are inconsistent with U.S. interests. For example, the EU asserts that "all electronic transmissions consist of services". In practice, because members have eliminated more barriers to trade in goods than to trade in services, this principle would allow our trading partners to backslide on existing tariff concessions for goods, such as books and music, that are digitally transmitted.

· Agriculture. The EU-Mexico FTA contains little coverage of agriculture. The imminent Japan-Singapore FTA and the proposed Japan-Mexico FTA are unlikely to cover most agricultural trade. As Japan and the EU create the precedent that trade in agriculture is too "sensitive" for international rules, the United States will find it increasingly difficult to open foreign markets for U.S. farmers.

H. Blocked Alliances. Preferential trade arrangements provide our trading partners with an opportunity to build alliances and to present a united front in negotiations with the United States. The formation of strategic alliances is perhaps most evident in the Western Hemisphere, where negotiations are underway to conclude the FTAA. MERCOSUR is negotiating FTAs with the Andean Community and Mexico, and has included Chile and Bolivia as associate members. Brazil, a powerful member of MERCOSUR, opposes an expedited FTAA negotiation and the rapid elimination of many trade barriers, while the United States has much to gain by moving quickly to eliminate trade barriers. Perhaps to enhance its position in FTAA negotiations, Brazil hopes to first solidify and expand MERCOSUR.

III. THE UNITED STATES MUST RETURN TO THE NEGOTIATING TABLE

The growing network of preferential trade arrangements that exclude the United States clearly harms U.S. companies, workers and farmers. U.S. trade policymakers therefore must re-engage immediately and aggressively in trade and investment negotiations. In fact, because the United States is the most competitive nation in the world, we can expect to gain the most from greater access to foreign markets. Indeed, our economic growth depends on access to foreign markets, as one-third of that growth is the direct result of exports.

We must proceed on multiple fronts. We must deepen our commitment to a new round of WTO negotiations, complete negotiations with Singapore and Chile, reinvigorate the FTAA negotiations and the APEC, and begin formulating entirely new trade and investment initiatives.

Granting the President Trade Promotion Authority is an important first step towards re-engagement on all of these fronts. Trade Promotion Authority not only will enable the United States to conclude important trade agreements, it would give our negotiators credibility at the bargaining table and, as a result, encourage our trading partners to move forward in negotiations. Without Trade Promotion Authority, our trading partners will be reluctant to engage in comprehensive and time-intensive negotiations with the United States and will turn to other nations to negotiate deals that exclude the United States.

The Business Roundtable is firmly committed to helping the public understand the benefits of international trade and investment negotiations and the need to give the President Trade Promotion Authority. In early 1998, The Business Roundtable initiated its BRT goTRADE programs. BRT goTRADE is a grassroots trade education and information program designed to help Americans better understand the benefits of international trade, and build support at the local level for trade expansion initiatives.

Why BRT goTRADE? Roundtable CEOs are convinced that the choices we make as a nation today on international trade rank among the important decisions that will define the American economic and social landscape decades from now. Forward looking trade policies will create increased opportunity and higher standards of living. A retreat on trade would imperil the prosperity and quality of life available to Americans of all ages and walks of life.

In view of BRT goTRADE's success over the past few years, BRT goTRADE continues to expand across the country. From 11 congressional districts in eight states in 1998 to more than 160 priority congressional districts covering 25 states today, the BRT goTRADE program has increased its reach across the country.

Each BRT goTRADE location undertakes a series of activities tailored specifically to the needs and circumstances of its site. These activities include:

· Establishing locally organized, pro-trade networks comprising businesses, workers and academics. These networks concentrate on developing, publicizing and leveraging positive local trade stories. In each district, scores of large and small companies and trade groups joined forces in these networks to promote a pro-trade agenda.

· Conducting statistical and qualitative studies on the local impact of international trade. These studies - the first ever done at the congressional district level - demonstrate clearly and convincingly that trade helps increase the standard of living for workers in each district. The studies also show that small businesses, even more so than large companies, rely on exports to survive and prosper.

· Releasing state studies that explain the benefits of trade. Last year, these studies focused on China's accession to the WTO and why its accession would be a win-win proposition for America's companies, workers, farmers and consumers. These studies helped make the case for Permanent Normal Trade Relations (PNTR).

· Creating a schedule of special community events and forums devoted to trade education and awareness, including educational outreach to local schools.

· Working with the news media to generate positive coverage of local trade successes or opportunities, and placing letters to the editor and op-ed articles written by local pro-trade luminaries in local papers.

Mr. Chairman, in this New Era of international trade and investment policy, standing still means falling behind our foreign competitors. I urge the Congress to give the President Trade Promotion Authority, so that the United States can move forward and resume its position of leadership in the global economy.