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Hearing on the Benefits of Expanding U.S. Services Trade Through an International Services Agreement

September 20, 2012

Hearing on the Benefits of Expanding U.S. Services Trade Through an International Services Agreement










September 20, 2012


Printed for the use of the Committee on Ways and Means


DAVE CAMP, Michigan,Chairman

WALLY HERGER, California
PAUL RYAN, Wisconsin
DEVIN NUNES, California
JIM GERLACH, Pennsylvania
TOM PRICE, Georgia
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut
RON KIND, Wisconsin


JENNIFER M. SAFAVIAN,Staff Director and General Counsel
JANICE MAYS,Minority Chief Counsel

KEVIN BRADY, Texas, Chairman

WALLY HERGER, California
DEVIN NUNES, California

RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut



C O N T E N T S 




Ambassador Michael Punke
Deputy United States Trade Representative and Permanent Representative to the World Trade Organization (WTO)

Dr. J. Bradford Jensen
Professor of Economics and International Business, McDonough School of Business Georgetown University

Mr. Thomas Klein
President, Sabre Holdings

Mr. Karl Fessenden
Vice President, Power Generation Services, GE Energy

Mr. Charles Lake
Chairman, Aflac Japan

Mr. Daniel Brutto*
President, UPS International

* Mr. Brutto will also testify on behalf of the Coalition of Services Industries (CSI).


Hearing on the Benefits of Expanding U.S. Services Trade
Through an International Services Agreement

Thursday, September 20, 2012
U.S. House of Representatives, 
Committee on Ways and Means, 
Washington, D.C. 


The subcommittee met, pursuant to call, at 2:30 p.m., in Room 1100, Longworth House Office Building, Hon. Kevin Brady [chairman of the subcommittee] presiding.

[The  advisory of the hearing follows:]


Chairman Brady.  Good afternoon.  I want to welcome everyone, extend a special welcome to Ambassador Michael Punke and our private sector witnesses.  Welcome, Ambassador. 

Let me also recognize Bob Vastine, the longtime President of The Coalition of Service Industries who stepped down yesterday and Ambassador Peter Allgeiere, CSI’s newly installed President.  These are two great leaders.  Bob has had a long and distinguished career in government and the private sector, and we have all benefited so greatly from his tremendous expertise and sound contributions.  Thank you, Bob. 

And as Co-chair of the Congressional Services Caucus, I join CSI and its members in expressing appreciation for Bob’s work and in wishing him well and in welcoming Peter, with whom I look forward to working  with in his new role.

I would also like to take a moment to acknowledge the service of Viji Rangaswami, the Ways and Means Minority Chief Trade Counsel, who will be leaving the committee after over a decade of service.  She has made important contributions in her work on free trade agreements, our preference programs, our trade remedy laws, trade adjustment assistance, and China policy.  Viji, we will miss your enormous expertise, your spirit of compromise and your good humor.  I know that my colleagues join me in wishing you the best of luck. 

In this economy creating U.S. jobs must be job number one.  That is why we are here today to discuss U.S. services trade.  We have a major opportunity at hand.  By negotiating an International Services Agreement that lowers barriers to U.S. service exports, we can rev up a great engine of American job creation. 

The service sector accounts for over three‑quarters of American jobs and economic growth.  These are not the stereotypical low wage, low skilled jobs that some would scornfully call McJobs.  Services jobs pay well.  For example, our businesses services sector, which includes engineering and design, computing and data processing, consulting and other services provided to business, these jobs pay nearly 20 percent more on average than jobs in manufacturing, averaging nearly $60,000 a year higher than the national average.  With over a half trillion dollars in services exports last year, America is the world’s most successful services exporter.  In fact we export more services than the two next largest service exporting countries combined. 

Because American service providers are such strong global leaders across many services sub-sectors, the United States has long generated a large trade surplus in services, which helps offset our deficit in goods trade. 

Our global competitiveness is not automatic, however.  American service providers must be able to maintain a global presence to sell our services around the world.  Their success depends on having on the flexibility to move their data and their know‑how around the world.  Yet U.S. service providers continue to face major trade barriers.  For example, countries impose equity caps, restrict data and capital flows, dictate the nationality of senior officials and impose discriminatory licensing and regulatory requirements.  But if we are able to lower services trade barriers around the world, our American services providers are well positioned to compete and win and will generate major new U.S. employment. 

These employment gains will come not just in the services sector, but throughout the American economy.  That is because services trade facilitates all economic activity.  E‑Bay recently did an interesting study that found its online auction services have allowed a vast number of small businesses in the United States to become exporters.  The National Association of Manufacturers and the Farm Bureau have produced two papers, and without objection I enter them into the record, laying out the many ways their members depend on U.S. services firms’ global operations to design, finance, market, transport and service American agriculture and manufacturing exports. 

The papers follow:

National Association of Manufacturers Paper
American Farm Bureau Federation Paper

Chairman Brady.  In short, we focus on services not instead of manufacturing and agriculture but to the benefit of manufacturing and agriculture.  As a result, I am very enthusiastic about the work that Ambassador Punke is doing in Geneva on services trade policy.  Thanks to his leadership, 19 WTO members, accounting for three‑quarters of global services trade, agreed in July to intensify discussions this fall about an International Services Agreement. 

This is an opportunity to extend to a much broader set of country the higher standard services rules from our bilateral trade agreements.  By pursuing an ambitious agreement that results in real trade gains for participants, we can generate new momentum for trade liberalization and ultimately reinvigorate WTO negotiations that create incentives for broad membership.  The benefits of the agreement should be available to all WTO members that are willing to commit to the agreement’s high standards. 

An International Services Agreement holds great promise for American workers and our economy, and I believe it would be met with bipartisan enthusiasm in Congress. 

And before yielding to the ranking member, without objection the opening statement of all members will be included in the record. 

At this time I yield to Mr. McDermott for his opening statement.

Mr. McDermott.  Thank you, Mr. Chairman.  Before I read my statement I would like to acknowledge Viji’s leaving.  As a member who represents a very trade dependent district with a major port and a major exporter of the United States and a lot of other large exporters operating out of my State, when you become the ranking member on the Ways and Means Committee on the Trade subcommittee, you ought to know something, but I admit I am a doctor and I don’t know very much.  But without the assistance of Viji as a teacher, I would not be able to do this job.  And we will miss her, I will miss her, and the committee will miss her.  And I want her to know it and she didn’t want anybody to say anything publicly about her, but Viji, please stand up.  She always knew that the member was the one who should be out in front. 

This hearing really is an opportunity to consider the importance of trade and services and the prospects of negotiating an International Services Agreement under the auspices of World Trade Organization, but before we think about the future prospects I would like to briefly recall where we have been the last few years with the WTO Doha Round. 

Doha was proceeding slowly to a dead end, yet some in the international community were cheering us on, we are almost there, we are almost there.  I don’t know how many time I have heard people come in my office and say that.  But fortunately the USTR wasn’t interested in proceeding on a path to a dead end.  Ambassador Punke, you deserve a great deal of credit for helping steer the WTO members onto a more constructive path, one that I think will strengthen the WTO as an institution in the long run. 

What is more, our stakeholders and our trading partners appreciate your frank, but respectful and deliberative approach to these challenges.  Thank you for your work on these issues and for testifying here before us today. 

This new path is just beginning to take shape, but it looks as if trade and services, a major and growing component of the world’s trade and area where the United States enjoys a trade surplus, will be an important part of the path forward. 

In my view, the International Services Agreement under the auspices of WTO is an exciting opportunity.  It appears to be the best way to achieve two objectives that often compete with one another in trade negotiations, ambition and inclusion.  We want an ambitious agreement, one that significantly opens new markets for U.S. companies and workers.  At the same time we want to promote a more inclusive international trading system; one that encourages the participation of all countries that are willing to make ambitious commitments. 

The WTO is the best place, it may be the only place for such an agreement to be negotiated.  To open new markets we will need to tackle new barriers.  Among other things, that means ensuring state‑owned enterprises compete on a level playing field, that data flows are not subject to unjustifiable restrictions, and that standards are not used to discriminate against foreign suppliers. 

I hope the United States and other interested WTO members will lay the groundwork this fall for a successful negotiation.  In particular, I would be interested in getting a better understanding of the position of our European partners in this endeavor.  At the end of the day I am confident that the EU will recognize that a services agreement would benefit European service suppliers just as much as American suppliers.  I also expect Brussels will recognize the systemic importance of negotiating an ambitious new agreement under the auspices of the WTO. 

And I commend the chairman for having this hearing.  Thank you.

Chairman Brady.  Thank you, Mr. McDermott.  And I am very pleased to turn to our first witness, Ambassador Punke, who is Deputy U.S. Trade Representative and Permanent U.S. Representative to the World Trade Organization.  Ambassador, thank you for coming today and for the energy, creativity and intelligence that you bring to the important work you are doing in Geneva.  We look forward to hearing from you, and you have 5 minutes. 


Ambassador Punke.  Thank you, Mr. Chairman and members of the committee.  I very much appreciate the invitation to speak before the committee today.  My focus will be on our efforts to develop a new International Services Agreement, but I want to take a moment to frame the efforts with a brief assessment of the state of play in the World Trade Organization. 

The WTO is clearly an institution at a crossroads.  After more than a decade of unsuccessful negotiations in the Doha Round, the collective membership finally acknowledged last December that the round is at impasse.  This situation has resulted in a fair amount of doomsday predictions in Geneva.  But our view is that the WTO can’t fix its problems without first acknowledging them.  What is more our successful effort to turn the page on Doha is creating important new opportunities.  It has provided a useful reminder of non‑Doha aspects of the institution.  It has also challenged us to learn from our collective mistakes in the Doha negotiation and to craft more constructive and productive pathways forward. 

Already only 8 months after the eighth Ministerial Conference there is a marked new energy in Geneva.  Technical negotiations on a multilateral trade facilitation agreement are advancing.  Discussions are underway to expand the product coverage of the Information Technology Agreement, or ITA.  These efforts are examples of how we are pursuing the President’s goal of doubling U.S. exports and creating new jobs for America’s farmers, ranchers, workers, companies and entrepreneurs. 

And as we look to new pathways in Geneva our work this year on services is particularly promising.  Over the past several months we have been working with a group of like minded WTO members to explore new ways forward.  This group with the admittedly bad name of Really Good Friends of Services, or RGF, first got together in the early years of Doha Round as a means for those members with a strong interest in services to coordinate their efforts.  A hallmark of the RGF is its diversity.  The group includes a mix of developed and developing countries that substantially reflects a cross section of the interest of the WTO as a whole.  Above all the RGF discussion has motivated by the conviction that opening up services markets is a critical factor in supporting economic development. 

The genesis of the ISA, the International Services Agreement, lies in our hard nosed assessment that we simply will not be able to make progress on services trade liberalization any time soon under existing WTO frameworks.  The positions of the major players are too firmly entrenched and too closely tied to a web of other issues. 

Meanwhile we hear the frustration from stakeholders who are understandably fed up with a lack of progress.  The world has changed and our rules need to catch up.  To take but one example Internet usage is 500 times greater now than when the Doha Round was launched in 2001, bringing with it a multitude of new issues related to cross border trade, such as policies that affect data flows and storage.  Our stakeholders want us to get to work in addressing these and a host of other issues. 

Faced with a choice between doing nothing or trying something different, we have begun to explore the feasibility of using a new multiparty services trade agreement to lay the pathway to further globalization services liberalization. 

The most logical place for us to start was to look at the more than 100 service agreements that have been notified to the WTO in the 18 years since the General Agreement on Trade in Services entered into effect, an exercise that we have conducted over the past 8 months.  Many of these agreements achieve a much higher standard for market access and incorporate new or improved rules to address real world problems. 

We believe it is time for forward thinking WTO members to consolidate these improvements and lay the foundation for extending them to the multilateral system.  The first step in achieving our vision is to bring the achievements of these varied agreements under a single umbrella, the ISA.  Like existing U.S. FTAs, the agreement would encompass all service sectors and modes of supply, and impose a high standard for liberalization.  The agreement would also provide a new platform where we could work to build a stronger international consensus on improved rules to address now issues. 

The potential benefits are compelling.  By moving to a multiparty agreement that reaches across geographic lines, we can create a steppingstone from the web of bilateral and regional deals back towards the multilateral system.  By establishing high standards for market access we can influence the norms of international trade.  By developing new provisions we can provide leadership to the global trading system. 

In addition to these systemic benefits, the ISA also offers the potential to strengthen our economic relationship with the other participants.  In just 6 months the RGF group has grown from 16 members to 20.  The United States currently has FTAs with only 10 of the 20 members.  The ISA therefore offers a venues to work on deeper services integration with partners as diverse as Japan, Taiwan, Israel, Pakistan and Turkey. 

Progress to date has been extremely encouraging.  Last summer we reached agreement on a core set of objectives and agreed to intensify our efforts this fall.  Our next step is for the group to develop more specific negotiating parameters so that each participant can conduct domestic consultations necessary in order to proceed. 

As for timing we do not have a hard deadline but would like to see things move forward as quickly as possible.  We are planning to have monthly meetings from September through December.  Throughout this process the administration will continue to consult closely with Congress and stakeholders to develop and refine U.S. objectives. 

We very much appreciate this hearing as a part of that process and look forward to the conversation today.

Chairman Brady.  Thank you, Ambassador.

[The statement of Ambassador Punke follows:]

Chairman Brady.  Members, as we move forward in this round, with Mr. McDermott’s permission, we are going to limit questions to 3 minutes.  Here is the schedule for our witnesses and the audience.  We have a classified briefing at 3 o’clock regarding Libya, Egypt and other matters with Secretary Clinton.  We expect votes to occur at the end of that classified hearing around 4 o’clock, 4:15.  And so at 3 o’clock we will recess until 5 minutes after the last vote in that series.

So Ambassador Punke, I’m very impressed with the large group of important WTO members you are bringing to the table for the ISA.  It appears though several of the leading emerging economies, China, India and Brazil for example, don’t seem to be interested in pursuing this agreement. Yet you look at some of the more important emerging economies that are joining, such as Turkey, Pakistan, Panama, Mexico, Costa Rica, Colombia, Peru and Chile, because of how quickly those emerging economies have moved forward, those are real promising markets in services. And so if we reach agreement, we have the chance to produce we think some real trade benefit. 

And so our challenge is to achieve robust emerging market participation. So the two questions, one I am interested in your views in how we keep those countries interested and at the table as you move through it. And secondly, my thought is that we are going to be better able to achieve maximum participation to the degree that benefits should be available to any WTO member that agrees to meet the high standard-and available only to those members.  And so I would like your remarks on that. 

Ambassador Punke.  Well, thanks for that.  I think it is important to emphasize that our preferred method of expanding services liberalization was through the Doha Round and through the broadest multilateral configuration possible.  The fact of the matter is that on an intensive basis for the first 2 years that I was in my position in Geneva and long before that, we had been trying to engage in that services conversation and with emerging economies and it was not successful.  They are not ready to move right now on services trade.  And so it was only very reluctantly that we came to the conclusion that the only decision that we faced was wait for them for some indeterminate period of time or to move forward with a smaller group of like-minded members.  And obviously the choice that we have embraced is to move forward with those who are ready to move forward now. 

I think what we are seeing is that that is a way of creating momentum.  And the worse thing I think that we could do in Geneva is have a situation where we have completely ceased to be able to conduct trade negotiations anymore.  And so I think the path that we are pursuing with the plurilateral agreement with the ISA is an opportunity to show momentum and then build outward from that. 

The other aspect of your question, Congressman, concerning how we extend these benefits, I think it has been the very strongly held position of the United States that it is not acceptable for major participants to free ride on concessions made by others.  And so we have been very clear from the beginning that when it comes to major participants in the global trading system that we can’t envision an outcome in which countries would have the benefit of concessions without providing obligations themselves.

Chairman Brady.  I think that is where we hit the right balance between ambition of higher standards but also maximum participation.  So thank you. 

Mr. McDermott. 

Mr. McDermott.  Thank you, Mr. Chairman.  As you are putting this together, some WTO members want to do it, some don’t.  Those who are sitting out, some of them think that this will weaken WTO as an institution if you would have a subset of people negotiating in this way, and the European Union in some ways is a part of that or at least seems to be.  I would like to hear your feeling about the negotiation, what it does to the whole WTO to have one set willing to negotiate and another set sitting out sort of waiting for I don’t know what, Godot I suppose.  So I really would like to hear your insider perspective on those negotiations and what is going on that they don’t want to participate in the larger negotiation. 

Ambassador Punke.  Well, to take the Europe piece of your question first, we have been engaging over the course of the last several months and weeks in an ongoing conversation with our European colleagues to figure out the best way to accommodate our mutual interest and needs in this negotiation and others.  And the line that that conversation takes is not always a straight line, in fact it seems to be always a jagged line.  But I do feel like in the last couple weeks in particular that we have gotten closer to figuring out a pathway that both of us can agree upon for moving in particular the ISA forward. 

Congressman, we have our next meeting of the Really Good Friends in the first week of October, and I am very hopeful at this juncture that we will be in a position then to give more clarity to what that path would be. 

But I want to touch briefly on the broader question you asked, which is how does the system accommodate at the same time these multilateral discussions with discussions in other configurations, for example plurilateral discussions.  And you would get the sense sometimes from listening to the recent debate that this is the first time that there has ever been a plurilateral in the history of the WTO.  And in fact that is decidedly not the case. 

In fact, in December at the ministerial meeting on the opening day the members of the WTO ballyhooed as one of their great achievements a plurilateral agreement, which by the way happens to not be extended on an MFN basis, and it is called the GPA, the Government Procurement Agreement.  And so we all ballyhooed that result on day one of the ministerial meeting last December and on the last day of the ministerial in December people were gnashing their teeth about a possible plurilateral kite called the International Services Agreement that somehow is going to bring down the system. 

We think that the system for a long time has been able to accommodate plurilateral agreements, multilateral obligations.  Many of the countries that are most critical of the ISA for not being multilateral discussions are some of the same countries that are most active in pursuing bilateral agreements.  And so the fact of the matter I think is that there is a lot of resilience in the system and the worst thing we can do in Geneva, as I said before, is to have a situation where no negotiations are taking place.

Mr. McDermott.  Thank you.

Chairman Brady.  Mr. Reichert is recognized for 3 minutes.

Mr. Reichert.  Thank you, Mr. Chairman.  Welcome and thank you for your testimony, Ambassador.  I am a member of the President’s Export Council and also the cochair of the Congressional Services Caucus, and part ‑‑ some of the discussions that we have around this issue is how do we emphasize the services sector as an enabler of economic activity and a facilitator for trade of manufactured and agricultural goods.  And I think ‑‑ I applaud you for being a champion of this, because more and more people across the country really need to become aware of the fact that the services sector is truly a player when it comes to increasing our trade and decreasing our trade deficit. 

So my question is you have discussed in your testimony the WTO agreement that focuses on the services, the General Agreement on Trade and Services, GATS, and it was negotiated over 16 years ago.  Since that time economies have evolved and in response we have developed important new liberalizing rules for services.  So for example, our trade agreement with Korea takes steps to ensure that countries do not unnecessarily restrict cross border data flows.  Now we are seeking to further develop those rules in TPP.  Could you elaborate on the new services trade rules that have been developed since GATS? 

Ambassador Punke.  I think that the first part of your question is something that has really been driven home to me in listening to conversation, for example this week as part of the CSI’s summit on services, and that is that not only are services important to economies for the services that countries export, including the services obviously that we export, but having modern services available in your country is a fundamental element of the basic infrastructure of being a modern economy.  And as you emphasized and as Chairman Brady emphasized, having good services is a critical component for conducting successful trade in manufactured goods and in agricultural goods. 

In a typical automobile factory, for example, 20 percent of the jobs are services jobs, like design and advertising.  A car that rolls off of the assembly line in Detroit requires 10 million lines of computer programming to run the computer systems on a typical car.  So this line between services and manufacturing and agriculture, as you point out, is one that breaks down pretty quickly when you start to look at the real world examples.  Yet, as important as services are, and when you think about how quickly technology changes, it is phenomenal that we haven’t in a multilateral setting updated our agreement for 16 years. 

I mentioned that if you go back to 2001 Internet usage was 500 times less than what it is today.  If you go back to when the GATS was signed in 1994 we didn’t have an Internet and yet that is our basic document for, our basic multilateral document for establishing the rules on services trade. 

The issue that you raised, data flows and data protection, is one of the critical ones that I think many members of the Really Goods Friends group are interested in developing new disciplines to address.  And I think that is a reflection of the recognition in all of our countries that we need to update our rules.

Mr. Reichert.  I appreciate it.  Thank you, Mr. Chairman.

Chairman Brady.  Thank you.  Mr. Herger is recognized.

Mr. Herger.  Ambassador Punke, I believe the Trans‑Pacific Partnership is an important vehicle for expanding U.S. services trade.  I am also enthusiastic about the ongoing high level working group with the European Union which I hope will lead among other things to important new services trade commitment between our world leading services economies.  Could you describe the relationship among TPP, TheEU initiative and an International Services Agreement? 

Ambassador Punke.  Well, it is an important question and I think all three of the four that you are talking about give us different opportunities for promoting the same goal of increasing our services trade.  I think as a very general matter that when you look at bilateral agreements versus regional or plurilateral agreements versus multilateral agreements the advantage that you have with a multilateral agreement is it that you have the broadest coverage in terms of participants, but oftentimes because of that broad participation you get commitments that are not as deep.  I think the other end of the spectrum is a bilateral agreement, where you have a very narrow number of participants, namely two, but you have the potential for very deep commitments. 

I think what the ISA gives us is potentially something in between.  And on the one hand we have a very significant number of participants already.  The 20 participants that have begun this discussion comprised about 70 percent of global trade and services already.  And yet some of those participants in that group, as I mentioned half of them, are countries that the United States doesn’t have Free Trade Agreements with.  And many of the important ones are not participants in something like TPP.  For example, we have Turkey and Israel that are participating in the ISA discussion. 

So I think the ISA gives us both an opportunity to negotiate disciplines that might not be covered in other areas and an opportunity to bring participants into the discussion that we otherwise wouldn’t be talking to.  That is just the significance of the group itself.  Beyond that systemically I think creating this platform already has drawn the interest of five countries who have decided that they want to participate in this formative stage.  And I think there is even greater potential if we can create this platform in a successful way to attract others into what we hope will be an ambitious level of obligation. 

Mr. Herger.  Thank you.

Chairman Brady.  Mr. Smith is recognized. 

Mr. Smith.  Thank you, Mr. Chairman, and thank you, Ambassador, for coming here today.  In early July in a press release the WTO members participating in International Services Agreement discussions said that they would undertake necessary consultations or procedures prior to any negotiations. 

Can you perhaps reflect or share your perspective on the steps that USTR or the EU or other countries are taking with respect to those consultations or procedures? 

Ambassador Punke.  Well, I will comment on ours.  I think that exercises like this hearing obviously are a critical part of our ability to provide transparency to the discussions that we are having.  In the ISA we are obviously in a very early stage where we haven’t yet even agreed specifically on what the architecture of the agreement will be, but we have made a very large effort to reach out to members of your staff, you know, going back even to last December I think when we were first starting to talk about the potential of exploring with other partners in Geneva the possibility of a new type of services agreement.  We have taken a lot of opportunities to discuss this with various stakeholder groups, including this week for example participants in the CSI summit. 

I would anticipate, Congressman, that as this process and the architecture becomes clearer that the formal and informal consultation that we have with Congress and stakeholders will intensify.  For example, through mechanisms like public hearings and Federal Register notices.

Mr. Smith.  Thank you, I yield back.

Chairman Brady.  Thank you.  Mr. Neal. 

Mr. Neal.  Thank you, Mr. Chairman.  I apologize for being late.  As you know the full committee is on the floor currently debating the TANF legislation. 

Mr. Ambassador, some of the countries currently causing the most difficulty for U.S. service suppliers are not participating in these negotiations for a plurilateral services agreement.  Example, Brazil.  Recently Brazil implemented very restrictive reinsurance limitations requiring insurers to cede more than 40 percent of gross written premium to local reinsurers, not unlike China in restricting insurers from ceding more than 20 percent of a single line of business to an affiliate.  What are the strategies afoot with your office to encourage some of our market priority countries, such as Brazil, to join these negotiations so that we can actually allow American companies to fully compete and participate? 

Ambassador Punke.  Well, Brazil is a country right now where I don’t want to over promise, because frankly we have been addressing this type of issue with Brazil for a long time in the WTO context and we have been frustrated in that effort.  One of the things that was interesting in the discussion that we listened to this week in CSI, at the Coalition of Services Industries summit, was a discussion by a large number of developing countries that see services as an important component of their development strategy, specifically opening up their services market as a component of their development strategy.  And we heard countries like Costa Rica and Mexico talk about how important that that has been for them.  They have come to that conclusion through their own analysis and process.  Brazil seems not to have come to that conclusion yet.  In many instances China seems not to have come to that conclusion yet.  And that is at the end of the day I think the reason why we haven’t made more progress multilaterally on services, is because major players like India, China and Brazil simply don’t see the universe that way yet. 

That is frustrating, but at the same time I think what we have decided is that we are not going to let that keep the rest of us from pursuing liberalization, for example, through the ISA.  In the meantime I think we have to address the type of issue that you are raising, reinsurance in Brazil for example through bilateral opportunities.

Mr. Neal.  And foreign direct investment in China, that is a compelling issue as well, the limitations that they placed on competition.  I think that is a considerable issue for this committee.  The advocacy that we often take is to open markets everywhere only to discover some of the trade practices that are embraced down the road really don’t level the playing field. 

Ambassador Punke.  Well, and China is an interesting example and obviously is a very large focus of our efforts in Geneva and across the board in terms of our trade policy.  We have had one small success with China recently in the services area, specifically on the investment issue with third party auto insurance.  And as you know, Congressman, the Chinese opened up that market last spring. 

Mr. Neal.  Right.

Ambassador Punke.  We have been watching very carefully how the implementation of that obligation is taking place.  Our initial signs are that this is starting to create opportunities for our insurance companies.  The Chinese ultimately came to the conclusion that it was in their interest to and helpful to them to have that competition and to have our high quality services providers in that market. 

Obviously we need to be able to succeed ultimately to have more countries come to that conclusion, which we see as being a very obvious one, that services are a fundamental part of your infrastructure.

Mr. Neal.  The 49 percent rule, as you know, is problematic in terms of control. 

Chairman Brady.  Thank you, Mr. Neal.  Ambassador, clearly there is bipartisan interest for this agreement.  This is important work, you are doing good work, and I appreciate and encourage you to continue the consultations with both parties as you go forward on this agreement.  Thank you for making time on your busy global schedule to be with us today.

As I mentioned, because of a classified briefing the subcommittee stands in recess unless 5 minutes after the last vote in the next series, which we expect will be somewhere between 4:15 and 4:30. 


Chairman Brady.  Folks, with Mr. McDermott’s permission, with the vote schedule and all that continues to change today, we want to be very respectful of your time.  So we are going to continue with our second panel of witnesses.  We will break for votes, come back for questioning.  Again, we will try to move through this as best we can.  Thank you for your patience here. 

I am very pleased to be able to introduce such an impressive set of senior representatives from the private sector.  They represent a wide spectrum of services subsectors, from education, the airline optimization, to energy services, to insurance, to express delivery. 

Dr. Brad Jensen is a Professor of Economics and International Business at Georgetown University’s McDonough School of Business.  He will testify about his groundbreaking research on services trade, which the Peterson Institute published to great acclaim last August.  Dr. Jensen is also prepared to discuss the increasingly dynamic education services sector given his employment in that sector. 

Mr. Tom Klein is President of Sabre Holdings, a leader in providing software and consulting to optimize the efficiency of the airline industry.  Sabre’s leadership in the travel services sector, which is the largest U.S. services export, is further reinforced by its ownership of Travelocity, the online travel reservation site. 

As Vice President of GE Energy, Mr. Karl Fessenden leads General Electric’s Power Generation Services business.  And I proudly represent the Eighth District of Texas, where energy services are key to who we are.  So I look forward to hearing Mr. Fessenden’s testimony. 

Mr. Charles Lake is chairman of Aflac Japan.  He is based in Tokyo.  So I believe he gets the prize for traveling the farthest distance to be able to testify before us today.  Financial services, including Aflac’s insurance business, are one of the largest U.S. services exports.  So I look forward to hearing Mr. Lake’s testimony. 

And finally, Mr. Dan Brutto is President of UPS International.  He will speaks to us about logistics services, and specifically express delivery, which is probably the quintessential example of a service that facilitates U.S. trade. 

Gentlemen, thank you for coming to speak with us today.  I ask that you limit your statements to no more than 5 minutes.  So let’s start with Dr. Jensen.


Mr. Jensen.  Chairman Brady, members of the committee, thank you.

Chairman Brady.  If you could hit that microphone. 

Mr. Jensen.  Chairman Brady and members of the committee, thank you for the opportunity to testify regarding the significant and often overlooked opportunity for growth through exports of U.S. business services.  I think we all recognize that the service sector is large and diverse, I think too diverse to be analytically tractable.  So for my comments today, I would like to focus on what I call business services, which are the industries classified by the North American Industrial Classification System, starting with five.  This includes the information sector, which includes importantly software, media industries, telecommunications and Internet; the finance sector, insurance, professional, scientific and technical industries ‑‑ think accountants, architects, engineers, attorneys ‑‑ and administrative support sector. 

This might sound niche, but these sectors, what I call the business service sector, accounts for 25 percent of employment in the United States labor force.  In contrast, the manufacturing sector accounts for 10 percent of employment.  So the business service sector is two‑and‑a‑half times the size of the manufacturing sector in terms of employment. 

In addition, these are good jobs.  The wages in tradable business in business services are 20 percent higher than the wages in manufacturing.  In addition, business services are tradable.  U.S. exports of services are growing rapidly, and now account for 30 percent of U.S. exports.  And business services are an important source of this growth. 

I would like to understand better what is going on.  Unfortunately ‑‑

Chairman Brady.  Dr. Jensen, if you would ‑‑ either someone has to get up when the alarm is ready to beep, or we are having some technical difficulties.  Can you punch your microphone off and on again?  That is not it.  Does someone have a BlackBerry close to the microphone?  Let’s try it again, Dr. Jensen.  You have a great testimony.  I just want to make sure it works.  Try it again. 

Mr. Jensen.  Thank you.  Okay.  So U.S. exports in services are growing rapidly, now account for 30 percent of U.S. exports.  And business services, the kinds of things that I classify as business services, are an important source of growth.  So I would like to understand better what is driving this.  Unfortunately, however, official statistics do not provide anywhere near enough detail to examine trade in services adequately.  A big part of my research has been to develop a methodology that allows us to identify, using the geographic distribution of production of services within the United States, allows me to identify at a very detailed level what business services are traded within the United States, and thus what are at least in principle tradable internationally. 

What I can do is then add up at a very detailed level how much employment there is in tradable business services.  And what we see is that there is a big chunk of employment in the United States.  Fourteen percent of the labor force is in tradable business services.  This is larger than the entire manufacturing sector. 

Beyond the size of the tradable business service sector, what might be more surprising is how different the workers in this sector are.  Workers in tradable business services are qualitatively different than either workers in manufacturing or workers in nontradable business services.  They have much higher educational attainment and much higher earnings.  Workers in the tradable business service sector are twice as likely as workers in either manufacturing or nontradable business services to have a college degree and an advanced degree. 

Business services are very skill‑intensive.  The skill intensity of business services, combined with the fact that the U.S. is still a relatively skill abundant place, means that the U.S. has comparative advantage in these activities.  The U.S. consistently runs a trade surplus in business services.  Yet in spite of comparative advantage in services and globally competitive service firms, as represented by the other panelists, U.S. business service firm participation in exporting lags the manufacturing sector.  When we look at the share of business service firms that export, it is much lower than in the manufacturing sector.  Only 5 percent in business services compared to about 25 percent in manufacturing.  If I look at exports to sales ratios in tradable business services, much lower than in manufacturing.  We should be exporting more. 

The reason is we are ‑‑ certainly a key contributor to this is, this data from the World Bank suggests, is that the large, fast growing markets have relatively high barriers to services trade.  India, Indonesia, China, Brazil all have high impediments to services trade.  We need to kick the door down.  There is enormous opportunity here.  And I think my time is up.  So thank you. 

Chairman Brady.  Thank you, Dr. Jensen, very much.

[The statement of Mr. Jensen follows:]

Chairman Brady.  Mr. Klein?


Mr. Klein.  Yes.  Mr. Chairman, members of the committee, thank you for the opportunity today.  Our team in South Lake, Texas, is honored for this opportunity.  Sabre Holdings is a software and electronic services distribution company. 

Chairman Brady.  Mr. Klein, can you make sure the microphone is on? 

Mr. Klein.  Yes, sir.  Our company is a software and electronic distribution services company serving the global travel industry.  We employ about 10,000 people, 4,500 in the United States, and do business in 135 countries around the world.  You may recognize, our consumer brand.  Sabre helps airlines be more efficient.  We make it easier for travelers around the world to visit the United States, where tourism and business travel dollars work to strengthen our economy and count as exports. 

Although we are a mid‑sized company, we believe we can compete with anyone in the world, and we focused intensely on the international market.  In our fastest growing business, our software business, in 2001 just 12 percent of our revenues came from international markets.  But we invested heavily to build out our global capabilities.  It took time, it took money, and we have seen great results.  Today, we have 65 percent of our revenues from those businesses coming from international markets.  That number will increase to about 75 percent over the next 3 years. 

We are meeting the global demand by creating many new high paying jobs.  Since the beginning of 2010, we have added over 1,400 positions globally, and more than 800 of these jobs in the United States.  The average American technology worker at Sabre makes $87,000 per year. 

Yet as innovative and world class as our software services become, the international playing field is not always level.  It is often tilted.  In those cases, we find it difficult, if not impossible, to compete. 

We all know that we need update our international legal framework for services.  The WTO General Agreement on Trade Services is over 15 years old.  In that time, we have seen the travel industries change dramatically.  We have also seen the technology industry change dramatically.  More than ever, individuals are searching for and booking travel online.  And the biggest growth in consumer‑driven travel is outside the United States.  Yet the trade rules haven’t kept up.  Governments take advantage of this vacuum to create protective measures and stymie competition. 

An International Services Agreement is a strong step in the right direction.  And taken at its fullest potential, a high standard agreement will lower barriers to important markets, create much needed pressure on other countries that are not participants in this discussion, like China, and will help generate momentum towards liberalization more broadly at the WTO. 

Such an agreement has the potential to help our company in a number of ways.  One important benefit that a services agreement may offer is increased transparency.  The more countries play by the same rules, and the more we know what those rules are, the easier it is to do business and resolve disputes when they arise.  FTAs have traditionally included strong transparency provisions, for example, requirements that countries publish regulations in a clear and timely manner, and consult with stakeholders.  Replicating these successes on a large scale would only benefit American companies, small and large alike, doing business overseas. 

One challenge for companies like ours is that countries often deny operating licenses to foreign companies in order to protect their own domestic enterprises.  For example, China’s state‑owned travel distribution monopoly, TravelSky, is the only licensed provider of passenger reservation services and airport departure and control systems in that country.  Foreign competitors, including Sabre, are fully shut out. 

Another challenge in our industry is often called in the technology industry the big data trend, how to store and search and access huge amounts of data in a way that is timely and useful for consumers.  In a global environment, having control over how that data is stored and distributed and used is critically important to our business and our customers.  An agreement that ensures that data can flow freely across borders would be a powerful tool for our business. 

The value of trade agreements is proven by our own experience in Chile.  We have had tremendous success there, including with LAN Airlines, which recently chose Sabre as its airline reservation system and operation system provider.  Our presence in that country before the FTA was much smaller, with a European competitor dominating the market.  After the FTA was signed, the Chilean Government put out an RFP requiring any bidder to use our European competitor’s automation services.  We brought that violation to the FTA, to the attention of the Department of Commerce, and within 2 days our government officials communicated the concerns to the Chilean officials, who acknowledged the violation and fixed the RFP.  It was breathtaking how quickly things can happen when there is clarity around what the regulations are. 

What is more, we looked at the numbers, and we also saw a significant increase in visitors to the United States from Chile following the enactment of that FTA.  That means more travel and tourism dollars going to our local economies to create jobs here at home. 

Mr. Chairman, thank you for holding this hearing.  As was reported yesterday, the travel industry has been and continues to be one of the strongest job creators in the current economy.  And our view is that a high standard International Services Agreement would only help continue that trend. 

I look forward to your questions. 

Chairman Brady.  Thank you, Mr. Klein. 

[The statement of Mr. Klein follows:]

Chairman Brady.  Mr. Fessenden.


Mr. Fessenden.  Chairman Brady, Ranking Member McDermott, and distinguished members of the committee, thank you for the opportunity to testify today on trade and energy services.  Just a moment of background on myself.  I joined GE in 1996, and have had leadership roles in the services side of both the aviation business as well as the energy portfolio over the last several years.  Today, I will describe my Atlanta‑based global organization, Power Generation Services, known as PGS.  I will share how we provide services across the U.S., across international borders through our commercial presence abroad.  I will also discuss the challenges and opportunities we face and the ways the committee can help us overcome them.  This subject is key, because removing barriers to energy services creates opportunities to grow the U.S. economy and to increase U.S. jobs. 

APEC’s recent success capping tariffs on some 54 environmental goods shows we can still make progress on trade liberalization.  Similar efforts should be now undertaken on services, particularly energy services.  Energy services is crucial to how GE helps our customers to provide clean, efficient, and reliable power.  PGS provides electric utilities with services to support GE’s gas and steam turbines, as well as other related equipment.  Service support begins as soon as we install the plant at the inception of the power plant, and lasts until it is retired, which could be as long as 30 years.  Our services span from contractual maintenance and equipment repairs to part provisioning and monitoring and diagnostics.  We have nearly 7,600 employees in over 100 countries, of which 4,100 are based in the U.S., and we have more than 50 GE sites in 15 countries on six continents, and are in nine joint ventures. 

GE’s ability to be a large manufacturer in the U.S. is directly tied to the services we provide, and is a key reason our customers purchase power generation equipment from us.  These factors offer opportunities and challenges.  Gas turbines are GE’s and our country’s biggest clean energy export.  We make these turbines in Greenville, South Carolina, where we have 3,400 employees.  We also make steam turbines in Schenectady, New York, where we have 1,400 employees.  Over 250 small to medium‑sized businesses in 24 States feed into our supply chain.  In the last 2 years, we have exported 100 percent of the gas and steam turbines we manufactured in the U.S.  Providing services for these turbines is a long term repeat business that keeps jobs in the U.S.  Clearly, it is key that we are able to service this equipment globally. 

However, many countries enact restrictions that prevents or delays us from providing these services.  The two restrictions that most limit my business are entry requirements and forced local content requirements.  My workforce includes 4,000 employees who spend most of their time at our customers’ sites making repairs and installing new parts.  Today’s environment demands that we are able to rapidly deploy these highly specialized energy services workers to sites in countries other than their home country.  However, entry requirements, such as visa application and work permit processes by host nations, impedes us from quickly deploying them and delays the host nation from receiving the services they provide.  The consequences of not responding due to lengthy work permit processes or customs delays are power outages and financial losses. 

Local investments can help develop stable, prosperous economies by expanding long‑term business opportunities.  GE knows firsthand the benefits of being a responsible local business.  We have seen how governments attract investments in local markets by establishing dynamic and entrepreneurial policies.  However, in recent years numerous countries have imposed forced local content measures which we believe are inefficient and ineffective, and should be avoided.  Their widespread adoption may discourage foreign direct investment and inhibit economic growth. 

We believe strongly in the power of free trade and open markets to strengthen the countries we trade with and invest in, supporting jobs, competitiveness, better governance, and strengthens the United States.  In 2011, services accounted for almost 30 percent of GE’s total revenues.  As services grows in GE’s portfolio, we rely on our ability to send an employee at a moment’s notice to locations around the world.  We believe we must establish multilateral agreements on liberalized trade and energy services.  We should push for incorporating meaningful measurements and commitments in our FTAs.  And we should develop a model international agreement to facilitate movement of highly trained energy services personnel between countries. 

Thank you for the opportunity to speak today. 

Chairman Brady.  Thank you, Mr. Fessenden. 

[The statement of Mr. Fessenden follows:]

Chairman Brady.  Mr. Lake, because the voting clock is quickly winding down, we are going to finish with your testimony, recess until 5 minutes after the vote series, which is just two or three, and then finish with Mr. Brutto.  So Mr. Lake, you are recognized.


Mr. Lake.  Thank you very much.  Mr. Chairman and members of the subcommittee, thank you for this opportunity to testify. 

Aflac is a major employer in the United States, and a leading exporter of service to Japan.  Thanks to the strategic leadership of our global CEO, Dan Amos, Aflac has been very successful.  In 2011, Aflac, which operates as a branch in Japan, generated $18.4 billion in revenues there.  It is the number one life insurer in Japan in terms of policies in force. 

As U.S. service companies export their products to the world, it is critical that our government continues to vigorously enforce existing trade agreements, especially in light of the efforts to address new trade challenges.  In addition, the United States should lead efforts to craft a WTO‑plus International Services Agreement.  Such an undertaking is a critical complement to efforts already underway to develop new global financial regulatory standards. 

Allow me to explain.  Following the global financial crisis, efforts to strengthen the global economic and financial regulatory architecture by creating new international rules and standards are underway, being led by the G‑20 and the Financial Stability Board.  We firmly support these efforts, and agree that the global crisis requires global solutions.  The work of these entities must be underpinned by the international regime, such as the WTO, which are fundamentally defined by the legal authority in their member governments granted through treaty or through commitments to undertake domestic implementing measures.  These commitments contain clear legally binding rights and responsibilities.  By contrast, institutions such as the G‑20 or FSB have been established not through formal treaties, but through the political commitments of their respective leaders.  Consequently, the scope of their activities must be limited by the existing authority of their member countries’ executive branches. 

However, in the rush to respond to challenges created by the global financial crisis, sometimes institutions overstep these limits.  For example, in late 2011, International Association of Insurance Supervisors, or IAIS, began a review of how foreign branches are supervised around the world.  From the beginning, this IAIS effort appeared to be agenda driven, with apparent bias against foreign branches, with this workstream leading towards the establishment of principles that would allow domestic regulators to force insurance companies to convert their branches into locally incorporated subsidiaries.  This would be inconsistent with the legally binding commitments made by the many IAIS members to abide by the WTO General Agreement on Trade and Services, or GATS.  GATS prohibits any government measure that restricts the form of legal entity through which GATS member provides services in another member’s territory. 

In Japan, we are starting to see troubling signs in relation to this issue.  According to a recently released policy statement, FSA is forcing ‑‑ appears to be forcing foreign branches to convert to subsidiaries, which would be at odds with Japan’s GATS commitments. 

Another major challenge facing U.S. companies is that posed by state‑owned enterprises, or SOEs, that compete with private insurance companies.  There are many state‑owned life insurance companies in Asia, including China Life Insurance, Life Insurance Corporation of India, Korea Post Insurance, and Japan Post Insurance. 

These and other challenges facing the U.S. services industry point to a huge need for a strong WTO‑plus International Services Agreement.  For the ISA to have relevance, it must address issues that confront us in the 21st century, while building onto WTO’s GATS.  There is no question that the G‑20, FSB, and IAIS must continue their important work to strengthen the global economic and financial regulatory architecture.  But given that these efforts can also lead to dramatic changes in the competitive environment, due care must be exercised to ensure that the process is not distorted to achieve the protectionist goals of their respective member governments. 

To this end, achieving a WTO‑plus ISA can have a dramatic impact in preventing protectionism and promoting fair and free trade in services, while complementing the growing efforts of entities like the G‑20, FSB, and IAIS.  This calls for strong U.S. leadership.  And to that end, in such efforts we stand ready to support this subcommittee, the executive branch, and our State governments to craft a coherent integrated approach that achieves a win‑win outcome for the United States and our trading partners around the world. 

Thank you. 

Chairman Brady.  Thank you, Mr. Lake. 

[The statement of Mr. Lake follows:]

Chairman Brady.  The committee stands in recess until 5 minutes after the last vote, which should be very soon.  Thank you.


Chairman Brady.  The hearing is called back to order.  Thank you again for your patience, all of you.  Mr. Brutto, you are recognized.


Mr. Brutto.  Chairman Brady, members of the Trade Subcommittee, on behalf of UPS and the Coalition of Service Industries, thank you for the opportunity to address the critical issue of removing obstacles to global trade in services.  As President of UPS International responsible for our company’s global expansion, I can think of no trade issue that affects the U.S. economy more profoundly than the services sector.  The U.S. is the world’s most successful services exporter, so expanding service trade through an International Services Agreement would greatly benefit the United States. 

Services are the lifeblood of our economy and of global commerce, the indispensable enabler of everything from trade in agriculture and manufacturing to the development and sale of high‑tech products.  If you want to make it, move it, buy it, or sell it, you need services.  Professional, financial, retail, and of course delivery and logistics services to get products to market.  The beneficiaries of efficient, unrestricted express delivery services are not just Fortune 500 manufacturers with global supply chains that depend on fast‑cycle logistics.  There are also millions of small and medium‑sized enterprises trying to ensure their products cost‑effectively reach the shelves of the global marketplace, or to the doorsteps of their customers in Beijing and Berlin, as well as Beaumont and Berea. 

At UPS, we have been working in a partnership with the U.S. Commercial Service for the last 5 years to support U.S. companies in exporting to countries around the world.  In 2010, we launched the Beyond One:  New Export Markets initiative to support efforts to expand the global reach of businesses that currently export to only one country.  This is an issue that rises to the very top of our organization.  Our Chairman and CEO, Scott Davis, serves on the President’s Export Council, and UPS has supported the national export initiative since its inception in 2010. 

The U.S. leads the world in services.  This sector accounts for more than three‑quarters of our Nation’s private sector GDP, and over 83 percent of our private sector employment.  That is the good news.  The problem is that we face significant barriers from complex customs processes, limited market access, to new areas like forced localization and unfair advantages given to state‑owned enterprises. 

A recent study by Georgetown University international trade economist and this panel’s first witness, Brad Jensen, suggests that removing these barriers would create three million more jobs in the U.S.  So how do we create these jobs?  A range of initiatives hold promise.  Allow me to identify a few. 

First, the U.S. can and should continue to support the development of an international agreement on trade and services.  And we applaud the work of the previous panel’s witness, Ambassador Michael Punke, who is leading the ISA effort in Geneva.  Although the world has witnessed rapid cross‑border growth in services in trade and investment, the Doha Round after a decade has made little progress in liberalizing this sector on a multilateral global basis.  That is why we need the negotiation of an ISA.  An ISA that is open to like‑minded WTO members will help achieve a high standard agreement that provides nondiscriminatory market access, most favored nation, and national treatment.  Ultimately, such an agreement would strengthen the WTO itself. 

In addition to supporting international service agreements, regional plurilateral agreement like the TPP offer an important pathway to move the ball forward on services liberalization.  We are glad to see that Mexico and Canada are on track to join the TPP, and we hope Japan will make the necessary commitments to join in the near future.  These three countries alone buy almost 25 percent of the U.S. service exports.  Other regional trading partners who share our liberalization should also have a way to join.  Overall, the current TPP member countries’ efforts to include high standards services commitments will make this an important agreement for trade and services.  

Third, there are bilateral opportunities for advancing open trade and services, including express delivery services.  The U.S.‑European Union High‑Level Working Group is an important venue for that work.  UPS is very supportive of the possible launch of negotiations of a U.S.‑EU Free Trade Agreement to strengthen our strategic economic partnership across the Atlantic.  We see strengthening the U.S.‑EU trade relationship as a cornerstone of our own success. 

In fact, our pending acquisition of Netherlands‑based TNT Express underscores our commitment to supporting the growth of trans‑Atlantic trade in helping the U.S. and European customers better tap the global market.  This acquisition, our largest in our 105‑year history, broadens UPS’ global footprint.  When you take a strong European brand and you combine it with a great American brand, the winners are the customers.  And UPS is especially excited about the possibilities what a combined brand means to our customers here in the U.S.  So a stronger partnership in trade between the U.S. and EU in time will bring tremendous benefits for both the U.S. and European exporters alike. 

In difficult economic times, it is all too easy to become protectionist, but that policy never leads to economic growth or job creation.  We have seen a growing list of restrictions being introduced abroad on trade services.  We cannot afford to ignore these if we seek robust economic growth.  Especially at this critical juncture in the global economic recovery, the U.S. must continue to provide an open market for trade and services on all fronts.  An International Services Agreement holds great promise for expanding U.S. services exports and strengthening the WTO, as do each of the other initiatives I have discussed.  Now is the time to pursue these to further stimulate U.S. growth and job creation.  Thank you for the opportunity to testify. 

Chairman Brady.  Thank you, Mr. Brutto. 

[The statement of Mr. Brutto follows:]

Chairman Brady.  We will start member questions of 3 minutes.  

One of the key takeaways from the testimony is how facilitating services exports helps our small and medium‑sized business exports and helps our manufacturing and agriculture sectors as well.  So this is all complementary.  Mr. Brutto, real quickly, do you have any metrics at UPS to show how when you export more it helps facilitate small and medium‑owned businesses do the same? 

Mr. Brutto.  Yeah, absolutely.  And I can tell you that our most recent free trade agreements, our volume for small and medium‑sized businesses is up over 20 percent.  So our trade to South Korea with U.S. exports, our trade to Colombia, to Panama, we have seen that growth.  That gives our U.S. exporters access to those markets.  The major inhibitor, though, is the complexity of duties and taxes and customs.  The second is access to capital and understanding the markets, and sometimes a different currency.  And three is the ability to sell the products in those foreign markets.  And certainly the U.S. Commercial Service is working with us.  It has helped many small and medium‑sized customers.  In fact, we have educated well over 2,000 small and medium‑sized customers so they can effectively get into multiple markets. 

Chairman Brady.  Right.  And certainly Dr. Jensen’s testimony is that the upside potential on this is remarkable for us.  Mr. Fessenden, how does the export of GE’s energy services help drive demand for GE’s manufacturing side? 

Mr. Fessenden.  Well, certainly as I spoke our services is a revenue stream for 20 to 30 years after the initial transaction.  But that initial transaction, of course, and the services are all based upon ‑‑ or a lot of it is based upon our manufacturing of parts and repairs that comes out of the United States in support of our global business.  So we are very tied to continuing to grow the manufacturing sector through the service support.  It is very important. 

Chairman Brady.  All right. Thank you, sir.  Dr. Jensen, I know it is always a challenge to measure services on trade data.  Government data is frankly not very good for services trade.  I fear we often make policy decisions with a fraction of real time data.  But to conclude, what have researchers found about facilitating services exports as far as helping manufacturing and ag become more competitive as well? 

Mr. Jensen.  So the research is limited because the data impediments are large. 

Chairman Brady.  Yeah. 

Mr. Jensen.  There has been work that the World Bank has done that has looked at countries that have liberalized their services sector and find that it does increase productivity in the manufacturing sector.  Work that I have been involved with the OECD suggests that increased business service imports increases exports’ share of output, particularly in commodity‑type manufacturing products.  So I think, you know, we think of business services as facilitating manufacturing trade and also increasing the value of manufacturing trade. 

Chairman Brady.  Right.  Thank you, Dr. Jensen.  Mr. McDermott. 

Mr. McDermott.  Thank you, Mr. Chairman.  Mr. Klein, I noticed when I was reading your testimony you were talking about a provision in the Colombia implementation bill that gives you some problems with Customs and the whole Customs funding. 

Could you explain a little bit more in depth what you are talking about and why it makes a difference to Sabre?  I don’t know what exactly your business model is, but I don’t understand how you and Customs get tangled up. 

Mr. Klein.  Sure.  I think it really affects the travel industry and the tourism industry into the U.S.  And let me explain.  There were some numbers released yesterday that suggest that the tourism to the United States drives about $153 billion of exports.  That is up 8 percent in 2011 versus 2010.  Customs staffing and efficiency at the airports is a barrier to people wanting to come to the United States.  The expectation across the travel industry, and our view is, that we should have world class services in our airports, that we should do the best job of anybody in the world of moving people and welcoming guests into the country, in that there is significant job creation and export benefit when we do.  That problem is about to get bigger.  We had a long term, almost a 10‑year loss in tourism market share, global tourism market share in the United States.  We went from 17 percent of global tourism to 12.5 percent.  And we are back on the upswing.  Again, big growth number last year.  We are going to continue to grow.  The budget for the CBP is tight, and they are not going to be able to add officers with this current budget.  The view is they won’t be able to add officers at the rate they are going to need to to deal with the growth in tourism.  And over time, that will hurt our ability to drive exports in the country. 

So, look, it is ‑‑ there is a bit of impact on our company.  I think this is a broader issue for the tourism industry and for export and jobs growth in the United States because of the impact of international tourism. 

Mr. McDermott.  How do you measure the amount that standing in line impacts people’s desire to come to the United States?  I now have the global entry thing, which I suspect all of you do who are tooling around on the international scene.  You walk through, put your fingerprints down, and away you go.  And I watched those long lines at Seattle when I came back the last time, and I wondered how you measure the impact of that.  People say I am not going to the United States because I have to stand in line? 

Mr. Klein.  That is a very fair question, Congressman.  I think there is two things here.  And I think from an industry perspective, the view would be in the United States we should be able to do this really well, and we should welcome guests into the country.  And people are coming here, they are spending about $4,000 a day.  And when they get here, it drives jobs.  We think the numbers are around for every 33 visitors we get, there is a job creation, one job created for every 33 visitors.  To measure the exact impact is difficult.  But the industry has done research around barriers to wanting to visit the United States.  And one of them is perception of whether we want people to come here, and whether we are welcoming them, and then what the experience is when they get here, what the hassle factor is in coming through Customs and Immigration.  And it is a factor in people’s decisions when they have choice. 

Mr. McDermott.  Thank you. 

Chairman Brady.  Thank you, Mr. McDermott.  Mr. Reichert. 

Mr. Reichert.  Thank you, Mr. Chairman.  And thank you for your testimony and your patience this afternoon.  As I mentioned earlier, I am on the President’s Export Council, and the cochair of the Goods Movement Caucus.  And there is a challenge in educating people on the need ‑‑ well, on the benefit that services provides and enables and facilitates trade of manufacturing goods and agricultural goods.  So I want to focus a little bit on how services exports facilitate trade in other U.S. sectors. 

And so just to Mr. Klein real quick, you have explained how services such as those offered by Sabre enhance the efficiency of airlines, and how this both aids U.S. airlines exports and facilitates tourism and travel to the United States.  But how could a services environment help a company like we have in Washington State called Boeing? 

Mr. Klein.  Sure.  Thank you, Congressman.  I think there is a couple ways.  One, the optimization software that we sell to airlines helps them either optimize revenues or reduce costs.  And healthier airlines are more likely to either refleet, modernize their fleet, or hopefully in a best case scenario, grow their fleet.  I have a current example, a recent example at Aerolineas in Argentina, where they frankly didn’t have the capability internally with their current systems to make some of those long‑term fleet planning decisions and to decide what markets, what new markets might be profitable to fly into.  We installed a series of operations software there, we put consultants on the ground to help them use it, and they now do have a fleet plan that also led to a commercial decision to join the Sky Team Alliance, which Delta is the big partner in that alliance, which adds 4,000 destinations in Argentina for Sky Team.  It adds lots of options for Aerolineas coming north.  Aerolineas is primarily a Boeing fleet.  They do have a small aircraft fleet of 190 or so Embraers who all have GE engines on them.  And they are going to be in the process now of modernizing and also expanding their fleet in response to some of the intelligence they have gotten out of the systems we have provided.  Those are just decisions they wouldn’t have been able to make without our tools or potentially some of our competitors’ tools. 

Mr. Reichert.  I think it is important to note that I think Mr. Fessenden said that 30 percent of your business is services.  So your employees understand it, and I think most of the employees at the companies that you represent understand that services is a key part of your business.  How do we get that message out to the rest of the country is my question.  And I don’t have time for you to answer it.  But I look forward to visiting with you maybe in the future. 

Thank you, Mr. Chairman. 

Chairman Brady.  Thanks, Mr. Reichert. 

Mr. Herger. 

Mr. Herger.  Thank you, Mr. Chairman.  I appreciate hearing the panel’s experience on the role foreign direct investment plays in allowing your companies to export around the world, and how it impacts jobs in the United States.  And in your experience, have you found that making investments abroad has helped or hurt your ability to create jobs here at home? 

Mr. Brutto.  I guess I will answer that.  Simple.  For UPS, every 22 packages that we export out of the U.S. creates a full‑time U.S. job.  So the simple math.  The more we export out of the U.S. ‑‑ and by the way, we started our international business essentially in 1975 in Canada, and in 1976 in Germany.  And we he have created literally thousands of U.S. jobs.  And it is simple.  I am overseas all the time.  That is where I spend most of my time.  I primarily work with companies to accept U.S. packages, as well as send their packages to the U.S. market.  But a simple thing for us is 22 packages equals a full‑time job. 

Mr. Herger.  Anyone else? 

Mr. Klein.  Yes, at our company, in our software business most of our growth is international growth, ex‑U.S. growth.  On a 20 percent growth rate, we will increase jobs by about 10 percent.  Half of that 10 percent will be in the United States.  And as I said, those are $87,000 a year jobs on average.  So it is good job growth whenever we get points of growth outside the U.S. 

Mr. Fessenden.  Congressman, I would just like to add that, as I mentioned, 100 percent of our gas turbines and steam turbines manufactured in Schenectady, New York, and Greenville, South Carolina, and the 250 small and medium businesses that support our supply chain in the U.S. all were exported.  And then we have 20 to 30 years of service revenue that will take parts that are manufactured from that supply chain and export them.  So it is extremely important and supportive of U.S. jobs. 

Mr. Lake.  If I may just jump in to make a comment on this as well.  As I mentioned, in Japan we are generating $18.4 billion in revenue.  Of that, pretax operating earnings that same year is $3.8 billion.  Of that, 80 percent on average we repatriate back to the United States, which are reinvested in building our infrastructure here as well.  So that is how we generate jobs as a company, as Aflac agents, and so on. 

Mr. Herger.  You know, I might mention something that you are already aware of.  What you have just said is not getting out to the American people.  You know, when they hear and are aware of jobs going abroad, they assume we are losing American jobs.  So I don’t know what it is collectively we need do as businesses to get this message out, but it is imperative to be able to allow us in the Congress ‑‑ some of us are already with you ‑‑ but certainly in the Congress to be able to make sure that we do this.  Maybe a last very quick one.  I am interested in hearing from the panel about the types of nontariff barriers you encounter that undermine your ability to export services. 

Maybe specifically, Mr. Lake, would you start off with what Aflac faces in Japan? 

Mr. Lake.  I mentioned in my testimony two issues with respect to inside the border measures that affect our business.  Certainly the state‑owned enterprise issues that go beyond banking, insurance, express delivery as well, and how in an integrated way they create challenges for us.  And I think that the key to understanding that is it is not even foreign versus domestic, it is private sector versus government‑owned entities.  That Banking Association of Japan, Life Insurance Association of Japan all very much want the same outcome, which is level playing field.  And so this is very different from the kind of trade friction issues that we had 20, 30 years ago that warrants a strategic approach.  And it is, again, not only in Japan, but it is in Korea and China.  So those are the examples that I would cite. 

Mr. Herger.  A very important hearing, Mr. Chairman.  Thank you very much.  But these are certainly issues that we as a Congress need to really concentrate.  And of course we are talking with our allies, with our good friends, but yet we need a level playing field.  Certainly the American people are demanding that.  So thank you very much. 

Chairman Brady.  No, thank you, Mr. Herger.  Mr. McDermott is recognized for a deeply probing question. 

Mr. McDermott.  I don’t know if I can rise to that level. 

Mr. Lake, I want to hear about Japan Post.  I have been over there and I have talked to them and talked to the Japanese members of the Diet about these whole issues.  From your point of view, explain to us what it is that makes it hard for you to do business, a service business in Japan in competition with the Japan Post. 

Mr. Lake.  We as a company believe that we can compete with anybody as long as the playing field is level.  And from that point of view, what are the advantages that Japan Post has that we do not?  Japan Post is allowed to operate a banking holding company, insurance holding company in a way that we certainly wouldn’t.  There are a number of measures that are applied to Japan Post in a way that they are not applied to any other private sector, not only Aflac.  So at the end of the day, if you go through all these measures that are applied, they are gaining advantages that no private sector company has, which gives them, with respect to capital, with respect to regulation, with respect to operating throughout Japan, the kind of advantages that no one has. 

So it is not a question of ownership, but it is the specific measures that are applied to help then gain the competitive advantages that they have.  That is part of the reason why, as I mentioned earlier, that domestic companies just last week as well as this week issued statements again calling for level playing field, and not allowing expansion of business because it is so huge, it is so difficult to compete with those advantages that I just talked about.  And I think, as you know better than anybody else, this committee has expressed concerns the past 10 years.  The executive branch has as well.  And I think we are coming to that point, in which they are about to expand further, that warrants appropriate response of this committee as well as the United States Government, in our view, to deal with those issues. 

Mr. McDermott.  Thank you. 

Chairman Brady.  All right.  Thank you, Mr. McDermott.  I think I speak for more than myself in saying this hearing has been very helpful in helping us document what a great opportunity you have at hand.  By negotiating an International Services Agreement, we can expand our services sales around the world and rev up this great engine of U.S. job creation. 

I want to thank each of the witnesses for their patience, for their insight, and for your ongoing work in keeping America globally competitive.  I want to invite all of you to join me in enthusiastically supporting the work the USTR is doing to move forward with establishing an ISA. 

Our record is open through October 4, 2012.  I urge interested parties to submit statements for the record.  On that, this hearing is adjourned.

[Whereupon, at 5:45 p.m., the subcommittee was adjourned.]

Submissions For The Record

Coalition of Services Industries 1
Coalition of Services Industries 2 
U.S. Chamber of Commerce