Statement of Franklin J. Vargo, Vice President,
International Economic Affairs, National Association of Manufacturers

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

Hearing on Summit of the Americas and Prospects for Free Trade in the Hemisphere

May 8, 2001

Mr. Chairman and Members of the Committee:

I am pleased to be here this afternoon on behalf of the National Association of Manufacturers in this important discussion of the outcome of the Quebec Summit of the Americas and the prospects for free trade in the hemisphere. The National Association of Manufacturers represents 14,000 American firms producing about 80 percent of all U.S. manufacturing output. Manufacturing comprises approximately one-fifth of all the goods and services produced by the U.S. economy, and directly supports 56 million Americans -- the 18 million American men and women who make things in America and their families.

Trade is of great importance to the NAM, for almost nine out of every ten dollars of U.S. merchandise exports are manufactured goods. Last year, U.S. exports of manufactured goods were $690 billion, 88 percent of total U.S. merchandise exports. The $52 billion of agricultural goods exported last year accounted for 7 percent of U.S. merchandise exports, and mining and all other industries accounted for the remaining 5 percent. Similarly, manufactured goods dominate our imports, where last year they accounted for 83 percent of the total.

About one-sixth of our total manufacturing output is exported, and for many important industries the ratio is much higher. For example, exports account for 54 percent of U.S. aircraft production, 49 percent of machine tools, 46 percent of turbine and generator output, 45 percent of printing machinery, and the list goes on.

FTAA--NAM'S TOP TRADE PRIORITY

Earlier this year, the NAM identified and prioritized its top trade objectives. This process, which included final review at this spring's NAM Board meeting, concluded that the NAM's top trade priority is the creation of the Free Trade Area of the Americas (the FTAA). The reason for this is that the FTAA would strongly affect the bottom line for American industry. It is of major significance to U.S. manufacturing production and employment, it is achievable in a near-term time frame, and it is of urgent importance.

There are two areas of the world where barriers are still high South America and Southeast Asia. The FTAA would eliminate barriers throughout the Western Hemisphere, creating the world's largest free trade area -- a market of 34 countries and 800 million people. The Western Hemisphere already accounts for nearly one out of every two dollars of all our exports. Most of this goes to Canada and Mexico, for the North American Free Trade Area (NAFTA) has generated a huge trade boom. We believe the FTAA will do the same for trade with Central and South America.

Last year U.S. firms exported $60 billion to Central and South America, an amount four times as much as we exported to China. But the market is only a fraction of what it could be. Trade barriers have been holding back both our exports and the region's economic growth. This does not just affect large firms. In fact, of the 46 thousand U.S. companies that export to Central or South America, 42 thousand -- 91 percent of the total -- are small and medium-sized firms.

Based on our experience with NAFTA, the NAM predicts that with the successful negotiation and implementation of the FTAA, our present $60 billion of annual merchandise exports to Central and South America would more than triple within a decade to nearly $200 billion. That would represent a very considerable increase in U.S. industrial production generating more high-paying jobs in America's factories. America's agricultural and services exports would also grow proportionately.

U.S. imports would grow as well probably by close to the same amount. The U.S. economy needs imports as well as exports. We benefit both by creating more high-paying export-related jobs and by being able to purchase imported goods more cheaply. America's living standard has benefited very strongly.

It is important to recognize that the industries that trade the most pay the highest wages. In fact, as seen in Exhibit 1, while trade-intensive industries paid an average annual compensation last year of $60 thousand per worker, industries that are moderately engaged in trade paid $48 thousand, and those that are not trade-engaged paid $44 thousand.

The Need for the FTAA

America is already a very open market. The FTAA would open markets for U.S. products in the rest of the hemisphere. Last year, the average import duty paid on all imports into the United States was only 1.6 percent. That is not a trade barrier; it is barely a speed bump. Moreover, two thirds of all our merchandise imports from the world last year paid no duty at all. They entered the United States totally duty-free.

American exporters to South America, unfortunately, face a different situation. There, duties in major markets average 14 percent or more, and it is not uncommon for U.S. manufactured goods to face duties of 20-30 percent or higher. For example, as one of our members, the 3M company recently testified, Colombia assesses a 20 percent duty on their U.S.-made electrical tape. Ecuador charges their filter products a 30 percent duty. And so it goes. Those are serious barriers. Exhibit 2 depicts average tariffs in the United States and South America.

Moreover, a recent World Trade Organization (WTO) report shows that Latin America has the highest bound duty rates in the world averaging 35 percent. Southeast Asia comes in second, with a 28 percent average bound duty. These are "bound" duties, the legal duty limits that countries are not allowed to exceed. While bound rates tend to be much higher than the rates countries actually charge, they are important because they are the basis for WTO negotiations and because countries are permitted to raise duties up to their bound levels if they choose.

Tariff barriers, furthermore, are augmented by costly customs clearance procedures, standards that can be used as entry barriers, expensive and redundant testing and certification procedures, and other obstacles to trade. Eliminating these tariff and non-tariff barriers would lower the cost of U.S. products in Central and South America and would significantly increase U.S. exports. Faster economic growth in Central and South America would occur as well, for their economic growth has been held back by their trade barriers. Removing trade barriers will enable production within these countries to become more efficient, allowing producers to focus on the goods and services they can produce most effectively, and lowering the costs of what they buy.

The best example is Chile, a country that for a decade has determined it can only increase its living standard by reducing trade barriers, focusing its production on what it does best, and importing the rest. The result? Chile's economic growth over the past decade has been the fastest in South America -- and has been double the average for all of South America. In fact, over the past decade Chile has been the third fastest-growing economy in the world.

There is a real urgency to negotiating the FTAA, for the European Union (EU) is also negotiating free trade agreements with key South American countries. This is no trivial matter, for the European Union currently sells about as much to South America as we do. The consequences for U.S. exports would be severe if the EU were to obtain duty-free access to these markets while U.S. exports continued to face duties that could be 20 or 30 percent. A huge shift away from U.S. products to European products would result. The latest development is that Japan is now exploring the possibility of free trade agreements with South American countries.

Opposition to the FTAA

Some very vocal groups are opposed to the FTAA. They would rather keep the status quo. Looking at the status quo--1.6 percent duties in the United States vs. duties ranging up to 20-30 percent in South America -- it is difficult to understand why anyone would believe we are better off by not reducing our duties and their duties down to zero. Under the status quo, especially if the EU obtains preferential access to South America, U.S. factories and the American workforce would be the big losers.

Much of the opposition to an FTAA is due to a belief that the North American Free Trade Area (NAFTA) has not been beneficial to the United States, and that the FTAA would compound this. Individuals taking this position have simply not looked at the facts. Far from being disadvantageous to the United States, NAFTA has been an enormous success.

For starters, NAFTA has resulted in an astonishing U.S. export boom. U.S. exports to Mexico have more than doubled since the initiation of NAFTA. The $111 billion we exported to Mexico last year exceeded our exports to Japan, Germany, and France combined -- the three largest economies in the world outside the United States. Last year Mexico accounted for close to one-third of all U.S. export growth worldwide. That is quite an achievement.

To see how strong an effect NAFTA has had on our export growth, consider the fact that U.S. exports to Mexico have historically tended to be about the same size as our exports to Central and South America, about $30 billion to each in 1994, for example. But since NAFTA, U.S. exports to Mexico have soared to nearly twice the level of our exports to Central and South America. This is dramatically visible in Exhibit 3. The FTAA will have the same effect on our exports to Central and South America as NAFTA did for our exports to Mexico.

But what about the import side? It is certainly true that our imports from Mexico rose even faster than our exports, and what was a U.S. trade surplus in 1993 has become a large deficit. This is a key reason why many view NAFTA as a failure for the United States. In fact, one organization claims this trade deficit has cost the United States 700,000 manufacturing jobs. The reasoning is that if exports create jobs, imports must destroy them.

There are two problems with this logic. The first is conceptual, for many imports simply don't compete with U.S.-made products or they fill gaps where the U.S. just can't produce enough to meet demand. For example, one-third of our deficit with Mexico stems from oil imports necessary to meet our energy needs. Additionally, the exceptional growth of the U.S. economy pulled in imports from Mexico along with imports from the rest of the world.

The second problem is that the facts just don't support an argument that the trade deficit with Mexico has cost manufacturing jobs. A close examination of the data shows that indeed there is a $17 billion deficit in our manufactures trade with Mexico. But one industry predominates: motor vehicles. In fact, we have a $24 billion deficit in our automotive trade with Mexico.

Note that the deficit in automotive trade with Mexico exceeds our total manufactures goods deficit with Mexico. What that means is that our trade with Mexico in all other manufactures is in surplus by $7 billion. Let me stress that point: U.S. non-automotive manufactures trade with Mexico had a $7 billion surplus last year. Moreover, that surplus has been growing in recent years--an almost unique phenomenon in our trade with the world. Thus, in the logic of those who equate deficits with job losses--since there is no deficit here, there is no net job loss.

If there has been a NAFTA job loss, it must have been in autos, where the trade deficit grew $20 billion since the initiation of NAFTA. However, this is not borne out by the facts either. In fact, employment in the U.S. auto industry, even after the recent decline in the U.S. economy, stands at over 100 thousand jobs higher than before NAFTA began. While total manufacturing jobs in the United States grew 2 percent from 1993 to 2000, auto sector jobs grew 20 percent ten times as fast. There has been no net job loss in the auto sector, and the reason is that the integrated North American auto industry really works, and it works for all three countries.

So where is the job loss? In the non-automotive manufactured goods trade surplus we have with Mexico? Or in the auto industry that has gained more than 100,000 jobs since NAFTA? The answer is that the facts simply do not support claims that NAFTA has led to a significant net loss in manufacturing jobs.

What about the "sucking sound" of a wholesale movement of U.S. factories closing their doors and moving to Mexico? Certainly some factories have moved to Mexico, but there has not been the flood that many seem to take for granted. Furthermore, many more U.S. factories have stayed right where they are and have expanded their payrolls to produce that $111 billion we are now exporting to Mexico.

U.S. balance of payments data show that there has been only a modest increase in U.S. investment in Mexico. Prior to NAFTA, U.S. companies invested $3 billion in Mexico (3 percent of global U.S. foreign direct investment). In 1999 (latest year available), they invested $5 billion (4 percent of global U.S. foreign direct investment).

Moreover, most of this investment increase has been in finance, wholesaling, retailing, etc. -- not in manufacturing. U.S. manufactured goods investment in Mexico has been fairly steady at about $2.5 billion per year since NAFTA began. This is only a fraction of the $35 billion invested last year by U.S. manufacturers abroad, mainly in high-wage developed countries. Three- fourths of U.S. manufacturing investment goes to the industrial countries. And in 1999, 40 percent of the manufacturing investment to the developing world went to one country -- not Mexico and not China but high-wage Singapore.

Thus it is clear that when one looks at what has really been happening, NAFTA is actually a great success. Rather than trying to avoid another NAFTA, we should seek to emulate it and expand free trade to the rest of the hemisphere, particularly in Central and South America.

THE PROSPECTS FOR HEMISPHERIC FREE TRADE

Let me now turn to the prospects for actually being able to obtain free trade in the hemisphere. An NAM business delegation visited Chile and Argentina last month to discuss the FTAA and the bilateral negotiations with Chile. After consultations with business executives and government officials we concluded that the chances for successful negotiation of both agreements are excellent. We found a lot of agreement on the negotiating agenda and an ample amount of common ground.

This is not to say the negotiations will be easy. We have high expectations and major goals to be achieved in the negotiations, and we will continue to press U.S. negotiators to obtain the best possible package of trade liberalization. Other business communities left no doubt that they will do the same. The negotiations will have to be balanced, with all parties seeing benefits. This is why everything must be put on the table for negotiation.

Considerable groundwork has already been done. Nine negotiating groups have worked over the past couple of years to lay out the framework for the negotiations. Notably, the trade ministers of the 34 nations met their goal of producing an initial bracketed text at the last month's FTAA ministerial meeting in Buenos Aires, Argentina. The U.S. leadership, Ambassador Zoellick and Secretary Evans, did an excellent job of defusing questions of timing, and obtaining agreement that actual negotiations would start next May.

Importantly, the Summit of the Americas in Quebec last month provided the final necessary ingredient -- the political agreement and commitment to move ahead. President Bush did what we had hoped. He laid out the FTAA as a key trade priority and stressed the U.S. would devote all necessary resources to the negotiations. The other ministers agreed and charged their trade officials to move ahead. The significance of the Quebec Summit is that it marked the end of phase one -- the planning and the groundwork, and the beginning of the next phase -- the actual negotiations.

Business not only strongly supports these negotiations, but is also helping pull them forward. Representatives of the U.S. business community and the 33 other business communities participated in the Americas Business Forum in Buenos Aires immediately prior to the FTAA Ministerial meeting. The purpose of the forum was to exchange views, find common ground, and make recommendations to governments. Clearly evident at the business forum was that business communities throughout the hemisphere want to move ahead. They recognize that Latin America's economic future can only be assured through the removal of trade barriers and the creation of a free trade area.

Also true, however, is that most Latin business communities are concerned about their ability to compete and survive in an open market. They are cautious, particularly about the period of time over which tariffs would be eliminated. The U.S. business community would like to eliminate as many tariffs as possible as soon as implementation of the FTAA begins. Few Latin business communities agree at this point. They argue that some sensitive industries will require more time to adjust. This will be an important part of the negotiations.

The NAM will continue to work with Latin American industries to maintain forward movement. For example, last week the NAM signed a memorandum of understanding with the Venezuelan industry association, CONINDUSTRIA, to begin a process of communication and cooperation -- particularly with respect to the FTAA. In signing that document, the Venezuelan industry leadership stated its strong support for implementing the FTAA by the end of 2005 -- or even earlier if that is feasible.

Bilateral Negotiations

In addition to the FTAA, the U.S. is currently negotiating a bilateral trade agreement with Chile. The NAM applauds this negotiation and wants to see it concluded by the end of this year. We seek a robust, world-class agreement that would quickly eliminate trade barriers and would provide full investment coverage. Based on our meetings in Chile last month with government leaders, key legislators, and business executives, we are convinced this is feasible.

There are two reasons for our strong support of this bilateral negotiation. First, the agreement will help expand bilateral trade with Chile. Chile is the most free trade-oriented country in South America, and is ready now to enter into free trade with the United States. Why should we wait until 2005 to begin obtaining improved market access through the FTAA if we can begin obtaining this access next year through a bilateral agreement? Of course, compatibility with the FTAA must be ensured.

The second reason is that conclusion of the agreement with Chile will reinforce the FTAA negotiations and serve to set high standards. Having an agreement with Chile will maintain the momentum of the FTAA negotiations. In fact, the NAM has urged USTR to commence bilateral FTA negotiations with other countries in South America. We understand that the Central American countries (accounting for over $12 billion of U.S. exports, four times as much as to Chile) have indicated their interest, as have other countries including Uruguay and Argentina. So long as the U.S. government has the capacity to engage in these negotiations, they should proceed as soon as possible. Like the Chile negotiations, additional bilateral negotiations will help ensure success for the larger FTAA negotiations.

NEEDED: TRADE PROMOTION AUTHORITY

In concluding my statement, I want to stress there is one absolutely essential prerequisite to these negotiations B providing the President with Trade Promotion Authority (TPA). Our trading partners insist on having the assurance that what they negotiate with the United States will be voted on as a single package. They will not negotiate under circumstances in which the final deal turns out not to be final, but is one which Congress modifies.

It must be stated bluntly: without Trade Promotion Authority, the FTAA negotiations simply will not move forward. I believe the same can be said for prospective negotiations on a new round in the WTO. The Latin business communities and government officials with whom we have met were all unanimous on that point: no TPA ... no negotiations.

Regrettably, some would applaud if there were to be no negotiations; but, as I stated earlier in my testimony, maintenance of the status quo means that we lose. Allowing Latin nations to keep their duties of 20-30 percent on major U.S. exports while we keep our 1.6 percent tariff speed bump against theirs is not a winning solution for the United States.

The time has come to stop negotiating with ourselves and to start negotiating with our trading partners. In particular, the issue of how to handle labor and environmental concerns has stalled us for too long. We must find a way to move forward, for the cost of continued inaction is about to get very expensive. How ironic it would be if we continued to debate labor rights in other countries while thousands of American workers began to lose their jobs as our foreign competitors completed trade deals with Latin America and took our export business away.

Business has already stated that it is prepared to view labor and environmental concerns in a flexible manner. Business is not opposed to good labor and environmental practices. U.S. business standards are the highest in the world, and we tend to carry them with us through our investments in foreign countries -- as is illustrated in a joint Manufacturers Alliance - NAM study of U.S. company practices in developing countries that will be released shortly.

We believe that if the objective genuinely is to advance labor and environmental standards in the world, then there are positive steps that can be taken. We remain opposed to trade sanctions, but we are ready to discuss alternatives and to look for creative solutions.

Neither business, nor workers, nor environmentalists would benefit from continuing the status quo in our trade relations with Central and South America. We will all do better with the FTAA. I believe it was Jean Monnet, one of the founders of the European Community, who said, "Let us all put ourselves on one side of the table, and the problem on the other side. Working together, we can move ahead."

Thank you, Mr. Chairman.