Committee on Ways and Means, Subcommittee on Trade, 3-29-01 Testimony

Statement of Harold McGraw III, Chairman and Chief Executive Officer, McGraw-Hill Companies,
New York, New York, and Chairman, Emergency Committee for American Trade

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:

Thank you for the opportunity to be here today.

I am Terry McGraw, Chairman and Chief Executive Officer of The McGraw-Hill Companies.

I am here today as Chairman of the Emergency Committee for American Trade - ECAT - an association of the chief executives of major American companies with global operations who represent all principal sectors of the U.S. economy. ECAT was founded more than three decades ago to promote economic growth through expansionary trade and investment policies. Today, the annual sales of ECAT companies total more than $1.5 trillion, and the companies employ approximately 4.5 million people.

The McGraw-Hill Companies is a global information services provider headquartered in New York City. We employ 17,000 people in more than 300 offices in 32 countries worldwide. You know us best through the McGraw-Hill imprint in education, Standard and Poor's, and Business Week.

THE CHALLENGE ON TRADE

The United States faces crucial choices in 2001 on whether our trade and investment policies will continue to support our economic growth and improve our high standard of living. Over the last century, the United States, now the world's largest trading nation, has enjoyed enormous prosperity in large part because of the open trade policies it adopted following the Great Depression, starting with the Reciprocal Trade Agreements Act in 1934. Over the last decade alone, U.S. exports have accounted for one-quarter of U.S. economic growth and have contributed significantly to the high standard of living enjoyed by American workers and their families. Imports have improved the variety, quality and availability of products throughout the United States, have increased the competitiveness of U.S. companies, and have been a significant factor in dampening inflationary pressures. As emphasized in the 2001 Trade Policy Agenda released by the United States Trade Representative, trade and investment not only support U.S. prosperity, they promote greater economic growth, freedom, and stability throughout the world.

In 2001, the United States has an important opportunity to move forward with trade and investment policies that continue to support U.S. prosperity and our global interests. It can play a leadership role in shaping and propelling negotiations globally, in the Western Hemisphere, in the Asia-Pacific and bilaterally throughout the world.

Yet, U.S. trade policy is at a crossroads. The post-World War II consensus on the value of liberalizing trade and investment policies has been shaken in recent years as is evident from Congress' failure to renew trade promotion authority, so-called trade-negotiating authority legislation or fast track, since its expiration in 1994 and protests against globalization in Seattle, Washington, D.C. and elsewhere.

From an historical view, most striking is the failure to renew trade-negotiating authority legislation that had previously been provided to all presidents, Republican and Democratic, from 1975 onward. Indeed, the forerunner to the modern fast-track procedures contained in the Trade Act of 1974 was tariff proclamation authority which had been granted to all presidents, almost continuously since the Reciprocal Trade Agreements Act of 1934; even that is no longer provided to the President except for some limited leftover authority from the Uruguay Round Agreements Act.

Last year, Mr. Chairman, you, Ranking Member Levin, Congressman Rangel and others in the House and the Senate were able to achieve some crucial victories on trade:

· Congress overwhelmingly supported Permanent Normal Trade Relations with China.

· It also reached a broad consensus on unilateral preferences for Africa and the Caribbean Basin.

We at ECAT very much appreciate all of your work on those and other matters. Indeed, the 106^th Congress passed more trade legislation than any other Congress in the last decade; but it did not pass, nor did it even consider, trade promotion authority legislation.

Clearly much more remains to be done.

THE UNITED STATES IS LOSING GROUND

Since the NAFTA and the Uruguay Round Agreements, the United States has entered into few significant new trade-liberalizing agreements. Meanwhile, our trading partners have aggressively negotiated new free trade agreements throughout the world. These new agreements exclude the United States and disadvantage U.S. companies and their workers.

Examples of Other Preferential Trade Agreements

The following are just a few examples of countries pursuing free trade agreements that exclude the United States:

Mexico: In the last year, Mexico continued its efforts to negotiate free trade agreements to build upon the NAFTA and free trade agreements that it had previously concluded with Chile, Venezuela, and other countries. On November 24, 1999, the EU and Mexico concluded a free trade agreement that was formally signed on March 23, 2000. The EU-Mexican agreement went into effect for industrial goods, dispute settlement, government procurement, and competition policy on July 1, 2000 and with respect to services, intellectual property, investment, and government procurement on March 1, 2001. The agreement is estimated to apply to 96 percent of EU-Mexican trade when the tariff reductions are phased in by 2003. As of July 1, 2000, 82 percent of Mexico's industrial goods were able to enter the EU free of duty. Approximately half of the EU's exports to Mexico are also duty-free.

After eight years of negotiations, Mexico completed free trade agreement negotiations with Guatemala, El Salvador, and Honduras in May 2000. The agreement covers market access, services, investment, intellectual property, and dispute resolution. Tariffs for industrial goods will be eliminated in 11 years and for agricultural goods in 12 years. The agreement is expected to enter into force in 2001.

On November 3, 2000, Mexico and the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland) concluded free trade agreement negotiations that will eliminate tariffs by 2007. The agreement covers trade in goods, services, intellectual property, procurement, competition policy, and intellectual property issues and includes a dispute settlement mechanism. It will provide substantially similar access to the Mexican market as provided under the NAFTA and the EU-Mexican free trade agreement.

Building on Mexico's existing free trade agreement with Uruguay, Mexican President Vincente Fox has indicated that he will seek to accelerate talks with Brazil, which began in early 2000, to reach a broad trade agreement. He also expressed willingness to extend any agreement reached with Brazil to the other MERCOSUR countries. Mexico is also engaged in discussions with Japan, Korea and Singapore.

Canada: Canada is also continuing to seek out other countries with which to negotiate free trade agreements, to build on NAFTA, Canada's free trade agreement with Israel, and its NAFTA-like agreement with Chile. In 2000, Canada began looking into possible free trade agreements with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Japan, and Singapore.

Chile: Chile is an associate member of MERCOSUR and has free trade agreements with Canada, Mexico, Venezuela, and Colombia. It has begun trade agreement talks with the EU and South Korea and is exploring the possibility of negotiations with New Zealand, Singapore and Japan.

The European Union: The EU is already the world's largest market and it is expected to expand through its continued enlargement negotiations with twelve Eastern European countries. In 2000, the EU continued the process of deepening integration among member states, broadening its borders to Eastern Europe, and developing deeper trade relations with other countries through trade preferences and free trade agreements. In addition to its Free Trade Agreement with Mexico, the EU's free trade agreement with South Africa entered into force on January 1, 2000 and its association agreement with Morocco entered into force on March 1, 2000. It is also proceeding with negotiations with MERCOSUR, several Gulf States, Chile, and other countries.

Effect on the United States and U.S. Companies and their Workers

By reducing or eliminating tariffs and providing other preferences among members, these agreements severely disadvantage U.S. companies. The tariff preferences alone directly raise the relative cost of American goods at the expense of our companies and workers. Other preferences act more subtly, but similarly result in the loss of U.S. exports and other activities in foreign markets.

Perhaps the most oft-repeated, but very important, example is Chile. It maintains a 9 percent tariff on virtually everything we ship. That means U.S. exporters suffer a 9 percent price disadvantage compared to our competitors from Canada, Mexico and Chile's other free trade partners. This affects every exporter to Chile and reduces our ability to do business. This price disadvantage has severely affected U.S. agricultural exporters who have had deficits with Chile over the past several years. Notably, in 1996, the United States exported $4.132 billion of goods to Chile. By the end of 2000, U.S. exports had dropped to $3.455 billion (actually an increase from 1999 exports of $3.079 billion). While other economic factors have affected U.S. exports, the tariff disadvantage we face in the Chilean market severely disadvantages our exporters, their workers and their families. We are, therefore, very pleased that the Administration has resumed bilateral negotiations for a free trade agreement with Chile this week.

The same stories can be told in other manufacturing sectors, in agriculture and for services as well.

Loss of Forward Momentum on Trade

Even more significant than these other agreements is the lack of forward momentum on trade when the United States sits on the fence.

Two weeks ago, I visited Brazil and Mexico and met with both countries' government and business leaders. I came away convinced that they are committed to substantially broadening trade and engagement with the United States, but they had concerns about the depth of our nation's commitment to far reaching regional agreements. The absence of such a commitment will likely lead to the creation of regional and bi-lateral agreements that exclude the United States.

If the United States does not play a leadership role in new negotiations, then much of the impetus for negotiations in the Western Hemisphere and in the WTO will be gone. Without those negotiations, we will be unable to open new markets, unable to reduce barriers, and unable to support the economic growth and standard of living that we have enjoyed in this country.

In the Western Hemisphere alone, the loss of these opportunities is enormous: The FTAA could join a population of 800 million, with a combined GDP of approximately $11 trillion. Yet, many of these countries maintain some of the highest tariff and non-tariff barriers in the world today. The United States' lack of trade promotion authority is one of the major reasons that Brazil has cited for its reluctance to enter into serious FTAA negotiations, which would reduce and eliminate tariff and non-tariff barriers. In the high tech sector, for example, only three countries in Latin America (Panama, Costa Rica and El Salvador) have signed onto the WTO Information Technology Agreement, which is likely to be included in the FTAA negotiations. For example, Brazil, with the eighth largest economy in the world, maintains tariffs of nearly 35 percent on Information Technology products. Even Mexico imposes 20 percent external tariffs on imports from non-NAFTA countries.

An issue of great concern to content providers such as The McGraw-Hill Companies is piracy of our intellectual property. Piracy of intellectual property - including motion pictures, music recordings, software and books - totaled over $8.7 billion in 1999. Sticking with Brazil, a country that has been placed on the U.S. Trade Representative's Priority Watch List, piracy of intellectual property totaled almost $920 million in 1999. Piracy of books in Brazil alone cost our industry almost $20 million that year.

Earlier this month, law enforcement officials in Korea announced the discovery of some 600,000 counterfeit English-language books with an estimated value in excess of $14 million. The counterfeit books comprising some 2,000 separate titles, run the gamut from popular best-selling fiction, to college textbooks, to reference and professional works. These books were in a warehouse belonging to Han Shin, one of the oldest book distributors in Korea. The raid on Han Shin underscores the fact that pirates are no longer fly-by-night operators requiring only a storefront and a photocopying machine, but have evolved into sophisticated high-tech enterprises that pose an even greater threat to legitimate publishers.

Without U.S. leadership on trade, we will be unable to address these issues through existing agreements or to conclude new trade agreements with even stronger provisions protecting intellectual property rights that could further help eliminate several of these major problems.

RESTORING U.S. LEADERSHIP/REBUILDING THE CONSENSUS

Mr. Chairman, Members of the Subcommittee. The United States must resume its leadership on trade issues. It must aggressively pursue regional, global and bilateral trade-liberalizing agreements throughout the world.

To do that, we must first rebuild the consensus on trade that has faltered in this country and lay the foundation for the passage of trade promotion authority later in 2001. To build that consensus, we at ECAT believe it is imperative to identify - and translate to the broader public - concrete trade and investment liberalization objectives to promote U.S. prosperity.

All too often, we have used the language of those who oppose trade. Rather, we must effectively make the case - as we did in the China debate - that trade agreements reduce barriers and result in concrete benefits for U.S. companies, their workers and their families.

This effort will require visible leadership - from the President, Congress and the private sector. We are working with the Administration, Congress and others in the private sector to define a set of concrete trade and investment liberalization objectives that will promote U.S. prosperity. Among the objectives are the specific benefits that the United States can reap from ongoing negotiations to conclude an FTAA and the launch of broad negotiations in the WTO, as well as other specific negotiations.

Our objectives should also recognize the importance of expansionary trade and investment policies as essential components in the continued growth of the new economy. ECAT has commissioned a new study, from Dartmouth College economist Dr. Matthew Slaughter on the linkages between the growth of the new economy and trade and investment policies, as one way to help reinvigorate the debate on the importance of trade and investment liberalization. In addition, ECAT supports concrete trade and investment objectives that will promote the growth of digital trade and ensure that electronic commerce benefits from trade liberalization in the WTO and in bilateral and regional trade agreements.

In defining our objectives, ECAT companies are particularly focused on the benefits for the United States, its workers and their families, that can be achieved through the conclusion of comprehensive, trade-oriented agreements. We therefore strongly support the renewal of the broadest possible trade promotion authority. Trade promotion authority legislation is critical for the United States to regain its leadership role in international trade negotiations. Following their experience in the Kennedy Round negotiations and the adoption of the trade-negotiating authority procedures in 1975, U.S. trading partners have generally supported, indeed sought, assurances that the President would have such authority to implement future trade agreements. Although only technically necessary to facilitate implementation of a final agreement by Congress, these procedures have taken on a much greater role in the eyes of U.S. trading partners, many of which have refused to take U.S. negotiators seriously (particularly in the context of multilateral negotiations) since this authority expired. Others have used the expiration of this legislation as an excuse to stall negotiations and not make important concessions. Timely renewal of such authority is critical in order to give U.S. negotiators the clout necessary to extract concessions and successfully conclude negotiations. Lack of this authority represents a serious impediment to the United States' ability to lead on trade issues, particularly with respect to both the FTAA and WTO negotiations.

Among our specific priorities are:

· completion of China's negotiations to enter the WTO;

· concrete progress at the Quebec Summit of the Americas in April on expediting negotiations to complete the FTAA before or by 2005;

· Congress' approval of the U.S.-Vietnam Bilateral Commercial Agreement;

· the launch of a broad WTO round encompassing agriculture, services, and industry; and

· bilateral negotiations with Singapore, Chile and other countries.

We also strongly support efforts to modernize how the U.S. government itself handles trade - from the outdated automated systems and operations of the U.S. Customs Service to the export control system. These systems must be modernized to keep pace with technological developments and the rapid pace of globalization. Similarly, we must ensure that the trade agencies of the U.S. Government have adequate resources to perform their jobs, from trade financing, such as the Ex-Im Bank, which needs to be reauthorized this year, to trade agreements compliance. Without these concurrent efforts, U.S. competitiveness will continue to be undermined at the expense of U.S. companies, their workers and their families.

ADDRESSING CONCERNS ABOUT TRADE LIBERALIZATION

In addition to defining our trade and investment objectives, we must also proactively address concerns about the trade agenda, including issues of labor and the environment. Without question, there are serious labor, environmental, and other issues that need to be addressed in the international context. Before rushing to adopt solutions that may not be effective, however, it is critical that policymakers first work to define the United States' objectives and then determine how they can best be achieved.

As the World Bank and others have documented, it is precisely through increased trade and economic growth that developing countries are better able and increasingly motivated by a growing middle class to improve labor and environmental standards. Since World War II, the liberalization of trade has produced a six-fold growth in the world economy and a tripling of per capita income and enabled hundreds of millions of families to escape from poverty and enjoy higher living standards. Proposals that would impede trade liberalization and economic growth must, therefore, be seriously questioned.

Mr. Chairman, Members of the Subcommittee. Most business leaders are practical people who generally approach issues without pre-existing ideologies. From my perspective, the way forward on these issues is to first reach consensus on what our objectives are in the international labor and international environment arenas - just as ECAT supports doing with respect to our trade and investment objectives.

After identifying and prioritizing our labor and environmental objectives, we need to identify the right solutions for each. My initial view is that - for the most part - these issues are best addressed through their own agendas in organizations with the appropriate technical expertise and not as add-ons to the trade agenda. Much, for instance, is already being done at the International Labor Organization, the NAFTA Commission for Environmental Cooperation and elsewhere. Those efforts can be intensified. For example, if our priority is to ensure clean water and sewage treatment along the Southwest border, won't increased funding of the North American Development Bank and similar activities be more fruitful than imposing sanctions on Mexico?

These issues are complex and some solutions that have been offered in the trade arena are counterproductive. Particularly compelling is the case of exploitative child labor. The International Labor Organization's International Program for the Elimination of Child Labor (IPEC), with significant financial support from the United States, is engaged in serious work to address child labor problems in several key countries. Their approach is based on almost a century of experience and recognizes not only the problem, but also its causes. IPEC has provided substantial support to many children and their families in a positive manner and does not, as some suggested solutions in this area have, result in moving children from one form of employment to another even less desirable sector.

Now, there will undoubtedly be cases, where our labor and/or environment and our trade goals complement one another. In such cases of complementarity, we should support both sets of goals in a cooperative and trade-liberalizing way. Consider the issue of agricultural subsidies in China, which have a devastating impact on water and land resources in that country. It is important for both trade and environmental reasons to help China end the use of such subsidies and to open its market to agricultural imports. This is an area of complementarity. Another obvious area is the issue of tariffs on environmentally-clean technologies. Reducing tariffs and promoting trade in these items will have a positive environmental impact throughout the world.

Linkages Must Be Positive; Sanctions Are Counterproductive

Three final points on these linkages. First, I and my fellow CEOs feel very strongly that any linkages with labor and/or the environment must be positive and not result in trade sanctions. Let me offer a few reasons:

· The practical - most countries that have labor and environmental problems that we want to address will simply not accept trade sanctions as part of a trade agreement.

· The impact - trade sanctions target export industries, which oftentimes have the highest labor and environmental standards as a result of the involvement of U.S. companies. Trade sanctions would undermine precisely those industries and the examples they set.

· The result - such sanctions are largely counterproductive. By impeding economic growth and trade liberalization, sanctions limit the ability and motivation of countries to increase such standards.

No Mandatory Inclusion of Labor and Environmental Provisions as Part of Trade Promotion Authority

Second, we should not use trade promotion authority to mandate the inclusion of labor and environment issues in all trade agreements. There remains much disagreement in the developing world, no to mention in the United States, over how to address these issues. Mandating the inclusion of labor and environmental issues will impede, rather than promote, the very trade liberalization and economic growth that support the adoption of higher standards throughout the world.

Already, many countries in the developing world are reluctant to move forward with trade liberalization. By mandating the linkage of labor and environmental issues to trade agreements, we create an additional incentive and excuse for these countries to oppose the very trade liberalization that will enable them to improve their economies and these standards.

Review and Transformation of the Trade Adjustment Assistance Programs

Third, we should address U.S. workers' anxieties about trade directly - through the reauthorization and transformation of the Trade Adjustment Assistance (TAA) programs that expire at the end of the September. Despite the importance of trade and investment liberalization in supporting economic growth and a high standard of living in the United States, there remains much skepticism on whether the United States should continue to pursue liberalized trade and investment. In a recently published book, Globalization and the Perceptions of American Workers, Drs. Kenneth Scheve and Matthew Slaughter review public opinion surveys dating back to the 1930s documenting this uncertainly. Their review indicates that while a large majority of Americans acknowledge the gains from globalization, a plurality to a majority are worried about the impact of trade and globalization on labor issues, particularly lower wages and the loss of jobs in this country.

The original TAA programs for workers and for firms were enacted as part of the Trade Expansion of 1962. These programs were premised on the recognition that while trade liberalization supports economic growth and prosperity for the United States as a whole, certain workers and companies may be adversely affected by the adjustment to trade liberalization. The TAA for Workers and the TAA for Firms programs enacted in 1962 were last modified in any significant manner as part of the Trade Act of 1974. The third TAA program, NAFTA-TAA for Workers, was enacted as part of the NAFTA Implementation Act in 1993 and is focused on workers adversely impacted by trade with Canada and/or Mexico. The NAFTA Implementation Act also established a fourth program, the Community Adjustment and Investment Program (CAIP), to provide funds for community adjustment and investment.

As the U.S. economy has changed considerably since the enactment of the original TAA programs, so have the needs of the U.S. workforce, particularly as technological development accounts for a substantial proportion of the dislocations experienced in the U.S. workforce. ECAT supports, therefore, an extensive review and transformation of these programs to address more fully the needs of today's workers.

While there is no lack of support for the objective of these programs, support for the extension of the TAA programs has declined in recent years as complaints have grown over the effectiveness and proper role of these programs. Last year, the Senate Finance Committee requested the General Accounting Office (GAO) to perform a comprehensive review of the three primary TAA programs and the CAIP in 2000.

The GAO's initial reports confirm some of the concerns over the TAA programs that have been raised in recent years. In its October 2000 report, Trade Adjustment Assistance: Trends, Outcomes, and Management Issues in Dislocated Worker Programs, the GAO found that 75 percent of TAA beneficiaries in FY 1999 were able to find follow-up employment, but only 56 percent of those workers earned 80 percent or more of their prior wage. While training improved wage and employment outcomes for workers, training rates have declined substantially in the 1990s (from 31 percent of eligible workers in FY 1995 to 18 percent in FY 1999). Some states have suspended training and established waiting lists because of Labor Department funding delays. Differing eligibility rules between the general TAA for Workers and the NAFTA-TAA programs also impede the provision of assistance, as do time limits on training.

GAO's review of the TAA for Firms program and the CAIP illustrated even greater concerns. In its December 2000 report, Trade Adjustment Assistance: Impact of Federal Assistance to Firms is Unclear, the GAO was unable to determine the impact of these programs since there is no formal monitoring and tracking of program results, as well as limited funding. In its September 2000 report on the CAIP, Trade Adjustment Assistance: Opportunities to Improve the Community Adjustment and Investment Program, the GAO found significant managerial deficiencies and inefficiencies that delayed implementation of the program for more than three years and continue to delay approval of loans and grants. Eligibility procedures are complex and appear to undercount dislocated workers. Furthermore, notification and outreach to communities designated as eligible are very limited, further undermining the ability of this program to address the adjustment needs of communities and workers. Since 1997, the CAIP provided $257 million in loan guarantees, loans and grants to 83 of the 228 eligible communities. Like the TAA for Firms program, GAO found that the CAIP lacks any monitoring system and, therefore, was unable to determine whether distributed grants and loans have been effective.

This year provides an important opportunity for engaging in an extensive review and transformation of the TAA programs to address more fully the needs of today's workers. Many scholars and others are already working on ways that this can be done. Proposals being developed include an expansion of the TAA programs to address technology-based dislocations, wage insurance, and/or health care portability. Notably, on November 14, 2000, the Congressionally established Trade Deficit Review Commission released a report -- divided along party lines -- on the causes and impact of the trade deficit. The primary area where members were able to achieve consensus, however, was on the need to provide effective worker adjustment assistance, including through the provision of new benefits, such as health care portability.

Nor is this solely the role of the Federal Government. The McGraw-Hill Companies and other ECAT member companies are actively involved in our own education and retraining efforts to address the needs of today's workforce. We have focused on continued education and intensive retraining through the use of community colleges, the Internet, and other education resources. These programs, in conjunction with government efforts, represent an important facet of worker readjustment efforts.

CONCLUSION

Mr. Chairman, Members of the Subcommittee. Trade and investment expansion are critical to the prosperity of the United States. The United States occupies a unique position of influence in the world. It is so important to provide the President with trade promotion authority not only to provide him the power and flexibility to negotiate agreements that advance our national interests, but also to assume the mantle of leadership the global community expects from the U.S.

One last point. After an incredible period of sustained economic growth, business is facing economic pressure not felt in some time. Consequently, it is more important and timely than ever that we rededicate ourselves to expansionary trade practices and open markets so that the promise of the global economy can be made fully available to U.S. business and workers as well as our counterparts elsewhere.

I and my fellow ECAT CEOs are committed to ensuring that the United States regains its leadership role on trade and pursues aggressively trade-liberalizing opportunities throughout the world.

I appreciate the opportunity to appear before you today on behalf of ECAT.