[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DOMINICAN REPUBLIC-CENTRAL AMERICA FREE TRADE AGREEMENT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 28, 2005
__________
Serial No. 109-18
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia Ranking Member
BARBARA CUBIN, Wyoming MIKE ROSS, Arkansas
GEORGE RADANOVICH, California EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania SHERROD BROWN, Ohio
MARY BONO, California BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska GENE GREEN, Texas
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
MIKE ROGERS, Michigan DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho JIM DAVIS, Florida
SUE MYRICK, North Carolina CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cohen, Calman J., President, Emergency Committee for American
Trade...................................................... 58
Kearns, Kevin L., President, U.S. Business and Industry
Council.................................................... 47
Lee, Thea M., Chief International Economist, AFL-CIO......... 51
Murphy, John, Vice President, Western Hemisphere Affairs,
Executive Director, American Chambers of Commerce of Latin
America, United States Chamber of Commerce................. 99
Roberts, Russell, Professor of Economics, J. Fish and Lillian
F. Smith Distinguished Scholar at the Mercatus Center,
Department of Economics.................................... 95
Roney, Jack, Director of Economics and Policy Analysis,
American Sugar Alliance.................................... 89
Vargo, Frank, Vice President, International Economic Affairs,
National Association of Manufacturers...................... 67
Vargo, Regina K., Assistant U.S. Trade Representative for the
Americas, Office of the U.S. Trade Representative.......... 18
Waskow, David F., Director of the International Program
Friends of the Earth....................................... 105
Additional material submitted for the record:
Retail Industry Leaders Association, prepared statement of... 123
Public Citizen, prepared statement of........................ 125
(iii)
DOMINICAN REPUBLIC-CENTRAL AMERICA FREE TRADE AGREEMENT
----------
THURSDAY, APRIL 28, 2005
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:05 a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Bass, Pitts,
Bono, Rogers, Otter, Myrick, Murphy, Blackburn, Barton (ex
officio), Schakowsky, Markey, Brown, Green, Strickland,
Gonzalez, Baldwin, and Dingell (ex officio).
Also present: Representative Solis.
Staff present: David Cavicke, chief counsel; Chris Leahy,
policy coordinator; Will Carty, professional staff; Larry Neal,
deputy staff director; Billy Harvard, clerk; Jon Tripp, deputy
communications director; Jonathan Cordone, minority counsel;
Turney Hall, staff assistant; and David Vogel, staff assistant.
Mr. Stearns. Good morning, everybody. The subcommittee will
come to order. This is the subcommittee on the Dominican
Republic-Central America Free Trade Agreement, or known as DR-
CAFTA. My colleagues, on a basic level, trade--particularly
trade between nations--it rests on an age-old theory of
comparative advantage. The laws of economic efficiency tell us
that we only should produce goods at which we are most
efficient and trade for all the others. This helps explain why
we can see efficiency gains and improved standards of living
when economically disparate countries trade with each other.
In these cases, prices reflect the most efficient means of
production, which, in theory, leads to a better standard of
living by effectively making all goods concerned less
expensive. This basic principle has been the bedrock of free
trade theory for over 200 years.
I must say at the outset that I am not here to challenge
Mr. Ricardo on his elegant principle, but I do think the
economic, social, and geopolitical complexity surrounding the
Dominican Republic-Central America Free Trade Agreement would
leave him a bit overwhelmed if he was trying to negotiate the
agreement today.
These complexities and profound effects make it extremely
important that we, as Members of Congress, understand why the
DR-CAFTA agreement efficiency and its net gains for our
economies in terms of import and export growth also could
produce for some United States job losses and less competitive
U.S. products and shifts in regional U.S. economies that create
winners and losers. Accordingly, the witnesses here before us
today represent a broad section of many of the constituencies
that will feel both positive and perhaps negative economic
effects of the DR-CAFTA, many of which constitute significant
parts, of course, of many of our home Congressional districts.
The signatories of this agreement include the United
States, the Dominican Republic, Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua. The agreement was signed in
2004. The agreement would create the second largest U.S. export
market in Latin America behind Mexico.
In 2004 U.S. trade with the DR-CAFTA region represented
about 1.5 percent of total U.S. foreign commerce, which
amounted to about $33 billion in trade flows, including about
$16 billion in U.S. exports to the region. The U.S. is by far
the largest trading partner to the DR-CAFTA countries. Most of
the import and export trade within the region covered by the
agreement is related to the merchandise, raw material, and
agricultural sectors.
Since the early 1980's, the U.S. has provided the region
one-way, duty-free trade preferences for the region under the
Caribbean Basin Initiative. In contrast to the CBI, the DR-
CAFTA is a reciprocal trade agreement that is designed to make
over 80 percent of U.S. consumer and industrial exports and
over 50 percent of U.S. farm exports to Central America duty-
free immediately.
Likewise, DR-CAFTA countries would enjoy duty-free status
on all our non-textile and non-agricultural products
immediately. In addition, the agreement includes a number of
unique provisions relating to expanded protection of
intellectual property right, new trade rules for e-commerce,
liberalization in the telecom sector, and improved labor
standards in the region. All of these are very good. The
committee has done a great deal of work in many of these areas,
and we look forward to hearing more about the DR-CAFTA elements
today.
But even with all these beneficial provisions and market
opening and commitments, this agreement still stirs up a lot of
strong opinion. I believe part of the reason is that all trade
agreements represent a compromise that, in theory, is crafted
to provide net gain to all parties. It seems obvious that
parties enter into trade agreements to gain, not to lose. Even
so, I believe the trade can cut both ways, regardless of
economic theory. There are different regional effects, social
impacts. As I mentioned earlier, different winners and losers
regardless of the politics. I have seen them and my
constituents have felt them. NAFTA, in my home district in
Florida, is probably a lot different than the one--the effects
in other parts of the country. It sits in the middle of a
different regional economy.
What this committee and this Congress needs to ensure is
that those net gains from these agreements don't outweigh the
inevitable cause for some of our people back home, our farmers,
our ranchers, and local manufacturers. We must do all we can to
make sure that all of these Ricardian economic principles,
efficiency translate into economic progress for all, not
stagnation or loss for some.
I would also like to emphasize I support the goals of
forging political and social reform in the region through
increased trade and economic progress. This is very important.
It is an extremely important undertaking in a world that
continues to challenge the ideals of democracy and economic
freedom. And I do believe the DR-CAFTA can be a very, very
important instrument to help achieve these ends in this
hemisphere. And this is important for all of our colleagues to
remember. The important objectives, however, must not obscure
the importance of providing those most affected by a shifting
economic landscape, the opportunity for them to be successful
too.
But let me be clear; stability in the region is an
important strategic issue for us. I believe the United States
should be the leader in this region, and there are enormous
global, political issues here which affect economic stability
and trade in these countries, and frankly, ours too. Positive
effects and results will help reinvigorate multilateral WTO
negotiations.
And I believe this is important. We just need to look at
the history, post-war Europe and the positive impact trade has
had for millions of Americans and the Europeans alike to
understand the power of free trade and trading partnerships.
But we must do it right, and we must remember that true, long-
term success in trade liberalization will depend on our ability
to sustain mutual long-term economic benefits for all Americans
under agreements like the DR-CAFTA.
And finally, I would like to thank sincerely the Assistant
U.S. Trade Representative Vargo and our other distinguished
witnesses from industry, agriculture, labor, academia, and
other interests for joining us here today in this open, frank
discussion and providing their views on this extremely
important agreement for our country. So we look forward to
their testimony and thank them for coming. And at that, I
welcome the opening statement from the ranking member, Ms.
Schakowsky.
[The prepared statement of Hon. Clifford Stearns follows:]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on
Commerce, Trade, and Consumer Protection
Good Morning. On a basic level, trade, particularly trade between
nations, rests on the age-old theory of comparative advantage. The laws
of economic efficiency tell us that we only should produce goods at
which we are most efficient, and trade for the others. This helps
explain why we can see efficiency gains and improved standards of
living when economically disparate countries trade with each other. In
these cases, prices reflect the most efficient means of production,
which, in theory, leads to a better standard of living by effectively
making all goods concerned less expensive. This basic principle has
been the bedrock of free trade theory for over two hundred years. I
must say at the outset that I am not here to challenge Mr. Ricardo on
his elegant principle but I do think the economic, social, and
geopolitical complexities surrounding the Dominican Republic-Central
America Free Trade Agreement or DR-CAFTA would leave even him a bit
overwhelmed. These complexities and profound effects make it extremely
important that we understand why the DR-CAFTA agreement's
efficiencies--its net gains for our economies in terms of import and
export growth--also could produce for some U.S. job losses, less
competitive U.S. products, and shifts in regional U.S. economies that
create winners and losers. Accordingly, the witnesses before us today
represent a broad cross-section of many of the constituencies that will
feel both positive and negative economic effects of the DR-CAFTA--many
of which constitute significant parts of our home districts.
The signatories of Dominican Republic-Central America Free Trade
Agreement include the United States, Dominican Republic, Costa Rica, El
Salvador, Guatemala, Honduras and Nicaragua. The agreement was signed
in 2004. The DR-CAFTA agreement would create the second largest U.S.
export market in Latin America, behind Mexico. In 2004, U.S. trade with
the DR-CAFTA region represented about 1.5% of total U.S. foreign
commerce, which amounted to about $33 billion in trade flows, including
almost $16 billion in U.S. exports to the region. The U.S. is by far
the largest trading partner to the DR-CAFTA countries. Most of the
import and export trade within the region covered by the agreement is
related to the merchandise, raw material, and agricultural sectors.
Since the early 1980s, the U.S. has provided the region one-way duty
free trade preferences for the region under the Caribbean Basin
Initiative (CBI). In contrast to CBI, DR-CAFTA is a reciprocal trade
agreement that is designed to make over 80% of U.S. consumer and
industrial exports and over 50% of U.S. farm exports to Central America
duty free immediately. Likewise, DR-CAFTA countries would enjoy duty
free status on all non-textile and non-agricultural goods immediately.
In addition, the agreement includes a number of unique provisions
relating to expanded protection of intellectual property, new trade
rules for e-commerce, liberalization in the telecom sector, and
improved labor standards in the region. The Committee has done a great
deal of work in many of these areas, and we look forward to hearing
more about these DR-CAFTA elements today.
But even with all of these beneficial provisions and market-opening
commitments, DR-CAFTA still stirs up strong opinions. I believe part of
the reason is that all trade agreements represent a compromise that, in
theory, is crafted to provide net gains to all parties. It seems
obvious that parties enter into trade agreements to gain, not to lose.
Even so, I believe trade can cut both ways, regardless of economic
theory. There are different regional effects, social impacts, and as I
mentioned earlier, different winners and losers, regardless of
politics. I have seen them, and my constituents have felt them. The
NAFTA that my home district in Florida knows is probably a lot
different than one in another part of the country, sitting in the
middle of a different regional economy. What this Committee and the
Congress need to ensure is that those net gains from these agreements
don't outweigh the inevitable costs for some of our people back home--
our farmers, ranchers, and local manufacturers. We must do all we can
to make sure all those Ricardian economic efficiencies translate into
economic progress for all, not stagnation and loss for some.
I also would like to emphasize that I support the goals of forging
political and social reform in the region through increased trade and
economic progress. This, I agree, is an extremely important undertaking
in a world that continues to challenge the ideals of democracy and
economic freedom. And I do believe DR-CAFTA can be a very important
instrument to help achieve those ends in this hemisphere. The important
objectives, however, must not obscure the importance of providing those
most affected by a shifting economic landscape the opportunity to be
successful too. But let me be clear, stability in the region is an
important strategic issue. I believe the United States should be the
leader in this region and there are global political issues here which
offer economic stability in trade. Positive efforts and results will
help reinvigorate multilateral WTO the Doha Round negotiations. I
believe that is important. We just need to look at the history postwar
Europe and the positive impact trade had for millions of American and
Europeans alike to understand the power of free markets and trading
partnerships. But we must do it right. And we must remember that true
long-term success in trade liberalization will depend on our ability to
sustain mutual long-term economic benefits for all Americans under
agreements like DR-CAFTA.
Finally, I would like to thank Assistant U.S. Trade Representative
Vargo and our other distinguished witnesses from industry, agriculture,
labor, academia, and other interests for joining us today and providing
their views on this extremely important agreement for our great county.
We look forward to your testimony. Thank you.
Ms. Schakowsky. Thank you, Mr. Chairman. I am pleased that
the subcommittee is taking the time to review the proposed
Dominican Republic-Central America Free Trade Agreement, DR-
CAFTA.
I want to welcome and thank all of our witnesses and all of
the members that have come. And I am particularly glad to see
that--I know that our ranking member of the full committee will
be here, and I want to acknowledge also the work of Mr. Brown.
While he is the ranking Democrat on the House subcommittee, he
is one of our best trade experts. In fact, he wrote the book,
or at least a book, on trade called ``Myths of Free Trade.''
For many common-sense reasons, there is wide and growing
bipartisan opposition to this bill here in Congress. It
endangers workers and jobs in the United States and abroad. It
endangers our economy and it endangers our environment.
Opposition to Congressional implementation of this flawed
agreement also runs deep outside of the Congress, throughout
this country and other signatory nations. The public, as well
as leaders from among organized labor, environmentalists,
economists, and business owners, and the clergy, all strongly
oppose the measure.
I am opposed to DR-CAFTA. It does not include the necessary
labor and human rights protections or environmental standards
that I believe should be at the center of our trade policies.
Instead, implementation of DR-CAFTA would result in the loss of
even more U.S. jobs, U.S. support for substandard working
conditions in other countries, and the degradation of our
precious environment.
I strongly support increased global trade for the United
States. However, when negotiated, I believe free trade
agreements should place human rights and labor rights and the
environment on equal par with the rights of capital. DR-CAFTA
fails to do so. Implementation of DR-CAFTA would further the
failed experiment that was NAFTA.
As a result of NAFTA, my home State of Illinois has
suffered the loss of over 100,000 jobs. And the Nation has lost
almost a million jobs due to the displacement of production
that supported them prior to the implementation of NAFTA.
Free trade agreements like NAFTA and PNTR for China
perpetuate the race to the bottom in the global economy. They
lower working and living standards for workers in other
countries, and they kill jobs in the United States. And DR-
CAFTA will be no different.
The only way to prevent the race to the bottom is to try
and raise standards in other countries so the lure of near
slave labor does not exist and does not harm our workforce.
NAFTA, PNTR, and CAFTA all failed to meet this standard.
This is one of the great challenges of the 21st century. If we
fail to meet it in the right way, it will continue to have dire
effects on our workforce and our economy.
Instead of pursuing policies that undermine the rights and
security of U.S. workers and workers in other countries, the
United States should lead the world by example through a trade
policy that improved the lives of individuals and not just add
to the profits of major corporations. Our policies should
benefit workers here in this country, create and sustain jobs,
and help our small and medium-sized and family owned businesses
grow. DR-CAFTA will not accomplish these goals.
The labor provisions of CAFTA are intentionally
unenforceable. Violations of core labor standards cannot be
taken to dispute resolution. The commitment to enforce domestic
labor laws is subject to remedies weaker than those available
for commercial disputes. This violates the negotiating
objective of fast-track that equivalent remedies should exist
for all parts of an agreement.
Further, the ``enforce your own laws'' standard allows
countries the opportunity to rewrite and weaken their labor
laws to attract investment.
I dispute the attempts by free trade proponents to reduce
the debate to a choice between free trade and no trade, this
agreement or no agreement. We can do better. We can achieve our
economic objectives and moral responsibilities through
responsible trade. And we can and should go back to the drawing
board and fix CAFTA if we want to do it right and if we want to
give it even a chance to pass.
If the vote were today, it is clear that DR-CAFTA would
fail to win a majority of votes in the House because it fails
our economy, our workforce, our environment, and our moral
standard on so many levels. Thank you, Mr. Chairman.
Mr. Stearns. I thank my colleague. We have a vote, and we
are going to temporarily recess the subcommittee. And I will be
right back. I urge my members to come back. We hope to have
everybody back after the vote. So it is temporarily recessed.
[Brief recess.]
Mr. Stearns. The subcommittee will reconvene. We will
continue with our opening statements, and we will go to--if Mr.
Murphy is ready.
Mr. Murphy of Pennsylvania. Mr. Chairman, my only statement
is I am here interested to learn about this. I have not yet
staked out a position on this issue, and so I am most
interested in hearing the testimony today and look forward to
that. Thank you, sir.
Mr. Stearns. I thank my colleague. Ms. Baldwin.
Ms. Baldwin. Thank you, Mr. Chairman. The terms on which we
conduct international trade are vital to answering some of the
most fundamental questions about what our Nation and our world
would be like in the decades to come, and in fact into the next
century.
How do we enhance and expand international trade while
protecting our environment? How do we promote sustainable
economic development? How do we prevent a spiraling decline in
wages and worker safety protections? How do we ensure fair
prices for our family farmers so that they can continue to
survive and prosper? These are difficult questions that must be
addressed. Unfortunately, our trade agreement track record has
failed to adequately address these critical issues.
The Dominican Republic-Central America Free Trade Agreement
presented an opportunity to take a fresh approach to create
free and fair trade. It was a chance to negotiate a new type of
trade agreement that addressed the issues of wages and worker
safety, of raising environmental and health standards, and of
advancing the rule of law and human rights.
International trade could and should be an issue which
brings people together around the world. Trade can deter war
and enhance peace. I believe the only way to build an effective
global trading system is to construct it through a democratic
process. Not only must the people be engaged in its
development, but the results must address their very real
concerns.
We will never be able to sustain a trade system that
results in a race to the bottom, the bottom in wages, the
bottom in air and water standards, the bottom in worker safety,
or the bottom in human rights. DR-CAFTA is a bad deal for the
people of the United States, the people of the Dominican
Republic, and the people of Central America. And this committee
and this Congress should reject it. I yield back.
Mr. Stearns. The full committee chairman, the distinguished
member from Texas, is recognized.
Chairman Barton. I was willing to suspend for Mr. Pitts if
he was ready to go. Thank you, Mr. Chairman, for holding the
hearing today. Our committee has jurisdiction over many aspects
of international trade, and I am glad that we are having a full
discussion of the issues involved with this particular trade
agreement.
I am glad that the USTR is here today. It is important for
the administration to come before the committee and make its
case to the members on the merits of these trade agreements. I
look forward to what they have to say about DR-CAFTA.
Under this agreement 80 percent of U.S. consumer and
industrial export and over 50 percent of U.S. farm exports to
Central America would become duty-free immediately. This means
more markets for American goods. According to a study by the
United States International Trade Commission, American
consumers would benefit to the tune of $166 million a year.
U.S. exports to DR-CAFTA countries are estimated to increase by
15 percent, while imports are estimated to increase by 12
percent. The American Farm Bureau Federation estimates the
agreement would expand farm exports by as much as $1.5 billion
a year. If we are committed to making rural America not just a
good place to live, but a good place to make a living, it is
hard to imagine another government policy that will do the job
as well as DR-CAFTA.
Moreover, markets never available to American
telecommunication companies--an industry in which we are
extremely competitive, and which is under this committee's
jurisdiction--would be opened, most notably in Costa Rica where
the industry is run by government-owned monopoly.
Some will argue that these increases in trade aren't worth
it, the stress of commercial competition that comes with them.
It is true that when competition asserts itself, not everyone
prospers, but the net future benefits to American consumers,
American farmers, and American industry are large, important,
and plain to see for anyone who is truly looking in an
objective fashion.
Significant advances in e-commerce, better protection of
intellectual property, progressive environmental protections
make DR-CAFTA an important step forward in trade negotiations.
More than just the economic advantages, passing this
agreement does more than a thousand speeches to tell the
developing world about the benefits of democracy and the rule
of law. It will reinforce the political reforms in Central
America that have helped in fighting terrorism, organized
crime, and drug trafficking.
I want to thank our witnesses for their attendance and
input today. I am glad that we have this opportunity to learn
more about DR-CAFTA, but go ahead and count me as a supporter.
With that, Mr. Chairman, I yield back.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank you, Mr. Chairman, for holding this hearing today. Our
Committee has jurisdiction over many aspects of international trade,
and I am glad that we are having a full discussion of the issues
involved with this trade agreement.
I am particularly glad that USTR is here today. It is important for
the Administration to come before the Committee and make its case to
the Members on the merits of these trade agreements. I look forward to
what they have to say about DR-CAFTA.
Under this agreement, over 80% of U.S. consumer and industrial
exports and over 50% of U.S. farm exports to Central America would
become duty-free immediately. This means more markets for American
goods. In fact, according to a study by the United States International
Trade Commission, American consumers would benefit to the tune of $166
million a year. U.S. exports to the DR-CAFTA countries are estimated to
increase by 15%, while imports are estimated to increase by 12%.
Furthermore, the American Farm Bureau Federation estimates the
agreement could expand U.S. farm exports by as much as $1.5 billion a
year. If we are committed to making rural America not just a good place
to live, but a good place to make a living, it's hard to imagine
another government policy that will do the job like DR-CAFTA.
Moreover, markets never available to American telecommunications
companies--an industry in which we are extremely competitive--will be
opened, most notably in Costa Rica where this industry is run by a
government-owned monopoly.
Some will argue that these increases in trade aren't worth either
our time, or the stress of commercial competition that come with them.
It is true that when competition asserts itself, not everyone will
prosper, but the net future benefits to American consumers, American
farmers, and American industry are large, important, and plain to see
for everyone who looks.
Also, significant advances in e-commerce, better protection of
intellectual property, and progressive environmental protections make
DR-CAFTA an important step forward in trade negotiations.
More than just the economic advantages, passing this agreement will
do more than a thousand speeches to tell the developing world about the
benefits of democracy and the rule of law. And it will reinforce the
political reforms in the Central American world that have helped in
fighting terrorism, organized crime, and drug trafficking.
I thank all our witnesses for their attendance and input today, and
I am glad we have this opportunity to learn more about DR-CAFTA, but go
ahead and count me in as a supporter.
Thank you and I yield back.
Mr. Stearns. Thank you, Mr. Chairman. And the ranking
member, Mr. Dingell, is recognized. Ranking member of the full
committee.
Mr. Dingell. Mr. Chairman, thank you for your courtesy and
thank you for holding this hearing. It is a matter of great
concern to many of our constituents, and it is a matter of
importance to American industry and American labor.
I am pleased that you were able to obtain at the eleventh
hour the cooperation of the United States Trade
Representative's Office. And they have sent a witness to join
us. For many years I have found them to be quite helpful to
this committee when we were evaluating matters of trade. It is
nice to see them back. And I look forward to many more
appearances in the future. I am troubled by the difficulty in
procuring their cooperation, but I am sure they will understand
they have a responsibility to respond to the concerns of the
chairman and the members of this committee.
I begin by pointing out that CAFTA is a bad agreement. It
is bad for workers. It is bad for the environment. It is bad
for farmers. We need not guess how this agreement will harm our
constituents, for this agreement is merely the son of NAFTA. If
you were pleased with how NAFTA has affected your workers and
your farmers, then you should support this agreement with
enthusiasm. If you believe that labor standards and
environmental quality have significantly and dramatically
improved in Mexico, as we were told they would, then you
should, by all means, support this agreement.
Evaluate carefully the claims that will be made today about
CAFTA. For example, we are going to hear today that CAFTA will
open important markets for U.S. goods. Sound familiar?
As we learned from NAFTA, if labor standards are not
improved as a part of these agreements, few workers in these
markets will be able to afford our goods. The end result is we
will not be helping the workers in the area. We will not be
helping our own workers. We will not be opening markets. And we
will be conferring no economic advantage in the United States
or, indeed, upon the workers in the countries this agreement
affects.
We make cars and trucks in my home State of Michigan.
American auto manufacturers are currently putting over $1,400
in healthcare cost into each and every American-made car. The
average Nicaraguan worker earns only about $2,300 a year. That
is for an entire year's work. While the rising healthcare
burden on American manufacturing is an important issue for
another day, it illustrates the absurdity of the claims made.
How many cars can we reasonable expect to sell in new markets
under these conditions? I suspect very few.
I urge my colleagues to examine this agreement with great
care, and to do so closely, as I intend to do. As you peel back
the layers of this onion, I am confident that any careful and
scrupulous viewer will be struck by an overwhelming sense of
deja vu and a strong feeling of frustration at promises that
have not been kept in the past and clearly that cannot and will
not be kept in the future.
I have rarely seen a more appropriate occasion for the old
adage, if you fool me once, shame on you. If you fool me twice,
shame on me. I urge my colleagues not to be fooled by the son
of NAFTA.
Mr. Chairman, I thank you for this hearing. I yield back
the balance of my time.
Mr. Stearns. Gentleman yields back the balance of his time.
The gentlelady from Tennessee is recognized.
Ms. Blackburn. Thank you, Mr. Chairman. I will waive and
save my time for questions.
Mr. Stearns. All right. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. I thank you very much
for your leadership, Chairman Stearns and Ranking Member
Schakowsky, for your leadership. And a special thanks to Brett
Gibson for his terrific work on this too.
Today, April 28, is the 11-month anniversary of the signing
of the Central America Free Trade Agreement. Every trade
agreement that President Bush has signed was voted in by
Congress within 60 days. Within 60 days. It has been 330 days
since CAFTA was signed by the President. May 28, the date by
which Leader Delay and Chairman Thomas will be voted on will
mark the 1-year anniversary of when the President signed the
Central America Free Trade Agreement.
Because CAFTA is so unpopular and because trade policy in
this country is so wrong-headed, that is why it clearly hasn't
come up for a vote. Democrats support free trade. We support a
trade agreement with CAFTA nations, but we don't support the
misguided agreement that USTR has negotiated. We need to
remember that CAFTA is non-amendable, no side agreements, no
side deals. If it is not in the core text of the agreement, it
simply doesn't mean anything. As Mr. Dingell said, we have been
down that road before.
One of the arguments that we hear a lot is that CAFTA
nations are large markets for U.S. goods. If we pass this
agreement, the same promises that Mr. Stearns and I have been
hearing on NAFTA and PNTR, if we pass this agreement, it will
be more exports for America, more jobs for America, growth and
manufacturing for America. And they tell us especially that
these CAFTA nations are large markets. But just do the math.
The combined purchasing power of the Central American nations
in CAFTA is the same of that--combined as the purchasing power
of Columbus, Ohio or Memphis, Tennessee, Orlando, Florida or
Pittsburgh, Pennsylvania.
CAFTA nations simply are not robust export markets for us.
The average salary of a Nicaraguan worker is $2,300 a year,
$191 a month. Nicaraguan workers can't afford to buy the cars
we make in Ohio; they can't afford the cuts of U.S. prime beef
at $13 a pound; they can't afford textiles and apparel from
Georgia and North and South Carolina; they can't afford to buy
software made in Seattle. I ask CAFTA supporters what American-
made product can Central American workers purchase who are
earning less than $200 a month. CAFTA supporters simply don't
answer those questions.
If corporations were serious about creating robust export
markets for American goods, they would be working to ensure the
Central American Free Trade Agreement's nation's labor
standards increased. Perhaps we should call this the Central
America Free Labor Agreement rather than the Central America
Free Trade Agreement because only when Central American workers
will earn enough to buy U.S. goods will trade be successful.
The Central America Free Trade Agreement expands the failed
trade policies of its dysfunctional cousin, the North American
Free Trade Agreement.
When I ran for Congress in 1992, the United States had a
$38 billion trade deficit. Last year, a dozen years later, we
had a $620 billion trade deficit, $38 billion to $620 billion
in a dozen years. The more you look at the face of this Central
America Free Trade Agreement, the better you see who will
benefit and who will pay the price. When the world's poorest
workers can buy American products rather than just make them,
then we will know that our trade policies are finally
succeeding. Unfortunately, the CAFTA before us will not succeed
in doing that. Thank you, Mr. Chairman.
Mr. Stearns. Thank you, gentlemen. Mr. Pitts, just to
confirm, did you waive? Okay. Mr. Rogers?
Mr. Rogers. Thank you, Mr. Chairman. I do believe that I
will waive, but I do want to congratulate you on reasserting
this committee's jurisdiction on trade. I think that is
incredibly important.
Mr. Stearns. Thank you. Mr. Green, the gentleman from
Texas.
Mr. Green. Thank you, Mr. Chairman. And like my Michigan
colleague, I want to thank you for making sure our committee
continues our jurisdiction over trade. I want to thank you and
also our ranking member for holding this hearing on CAFTA.
I am pleased to see that the committee exerted our trade
jurisdiction, giving committee members an opportunity to
express our views on this particular trade agreement.
As a business major at the University of Houston and being
in business for 23 years, I am no stranger to the theory of
competitive advantage and the promises it held for countries
around the world. But I know all too well that theory and
promises are very different. What may sound good in the
business college classroom doesn't work out in the real world.
The unfortunate reality is that the bulk of our free trade
agreements have led to the erosion of our once-great
manufacturing sector and the middle-class jobs it created. And
I am proud to represent the third most blue collar district in
our country. My constituents are the type of hard-working
people all across this country who lost their jobs as a result
of free trade agreements we have entered in the last 10 or 15
years. In fact, NAFTA alone led to a 50,000 net jobs loss in my
State of Texas. Now, Texas benefited economically, but not the
folks that I represent.
And don't get me wrong, I don't have a blanket opposition
to free trade agreements, per se. Last year I voted for the
U.S.-Australia Free Trade Agreement because Australia and the
U.S. have comparable standards of living. And the agreement put
the two nations on a level playing field. That agreement
facilitated not only free trade between the two countries, but
fair trade as well.
While my primary concern is with protecting the American
worker, I am highly suspicious of this agreement's ability to
better the lives of workers in the CAFTA countries. It is no
secret that this agreement was modeled after NAFTA, which I
voted against. One would think our country would learn from the
many failures of NAFTA instead of applying the near identical
trade provisions in Central America and the Dominican Republic.
It is easy to form a picture of what life for the Central
American workers would be like under CAFTA. All we have to do
is look at how the typical Mexican worker has fared under
NAFTA. Unfortunately, the answer is not too well. In February I
was in the central part of Mexico and discussed the problems
that they have had with the loss of their job base, first with
NAFTA with the agriculture sector, but now after permanent
trade relations with China, so many of those jobs that moved to
Mexico are now moving to China. True, the wealth in Mexico
increased, but it is not distributed evenly.
Since NAFTA, an additional 19 million Mexicans are
impoverished, and President Vicente Fox has stated that 54
million Mexicans can't meet their basic needs. With 10 percent
of the Mexican population controlling half of the nation's
wealth, it is easy to see that the average Mexican worker has
not been a beneficiary of NAFTA. And I see that in our own
country. We have seen, since 1993 when NAFTA was passed, the
huge disparity between the CEO pay and the people that I
represent.
Like NAFTA, CAFTA also disregards the interest of the
American worker. CAFTA puts our country at a competitive
disadvantage because Central American countries and the
Dominican Republic have much lower standards of living than the
United States. The blue collar workers in my district receive a
living wage and make a thriving middle class in Houston. They
cannot compete against the same worker in Nicaragua whose wages
hover around $200 a month for the average worker. CAFTA would
not better the lives of American workers. Instead, it would
just open the door for American multinational corporations to
shift operations overseas for cheap labor.
Make no mistake; this is not in the interest of the
American worker. It is high time our county, both Democrat and
Republican, stop giving away the farm on free trade agreements.
Our country's livelihood is manufacturing, and the middle class
is at stake. Mr. Chairman, I yield back what time I have left.
Mr. Stearns. Thank the gentleman. The gentlelady from
California, Ms. Bono.
Ms. Bono. Thank you, Mr. Chairman. I have been a long-time
supporter of free and open trade. However, this time, I do
harbor some reservations about supporting CAFTA. First, I am
concerned about its impact on U.S. agriculture. Specifically, I
am worried about how it would affect American-grown fresh
fruits and vegetables, which are the mainstay of the
agricultural industry in California's 45th Congressional
District.
According to the USDA's Economic Research Service, between
the years 2000 to 2004, the countries included in the Central
America Free Trade Agreement imported nearly $1 billion of
fresh fruits each year. The U.S. exported an average of
$295,000 of fresh fruits during the same period. In the
vegetable industry the percentages are very similar. From 2000
to 2004 the U.S. imported an average of $96.5 million worth of
fresh and frozen vegetables from Central America while
exporting a mere $79,000 worth of vegetables to that part of
the world.
While I do not believe we should put up trade barriers, I
do think we should ensure a level playing field. One important
step toward this goal is adopting mandatory country of origin
labeling without delay.
But without question, my biggest reservation about
supporting CAFTA has to do with intellectual property rights.
While countries in this trade agreement are not necessarily the
world's leaders in violating international IP agreements, it is
difficult for me to imagine how we could convince these nations
to be law-abiding when we do not do nearly enough to ensure the
compliance of other trading partners like China.
I realize many sectors of the agricultural, entertainment,
and technology industries are supportive of CAFTA, free trade,
if it is fair, is valuable to our economy. But I believe we
need to get our own house in order prior to opening our doors
to more trading partners. If we keep looking the other way and
delay getting tough on IP violations, we will be weakened by
our own doing.
Mr. Chairman, I will keep an open mind when it comes to
weighing the pros and the cons of this trade agreement, and I
look forward to hearing from these witnesses today. Thank you,
and I yield back.
Mr. Stearns. Thank you. Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, Mr. Chairman. I am going
to try to be brief. Then I am going to be asking for permission
to do something, which I am not sure that I am allowed. But
with the chair's permission, I should be able to do it if I
don't take up all of my time I--quickly, this is the greatest
fear. You have heard everyone speak at this point. You can
pretty well figure out if they are for or against this. I am
one of those whose mind has not been made up, and I sincerely
mean that. And I am waiting for persuasive arguments from both
sides.
This is what I fear and I would caution against. In the
January 25 issue of ``Congress Daily,'' this was the report:
``The Bush Administration and K-Street backers of the U.S.-
Central America Free Trade Agreement will argue that the pact
reinforces political stability in the region and try to cast
opponents of the agreement as anti-Hispanic.'' Sources familiar
with the pro-CAFTA coalition strategy said, ``What message
would it send to say we are not going to trade with poor
Latinos,'' said a U.S. tradeofficial who has been in contact
with the pro-CAFTA business lobby on strategy for lobbying
Congress on the agreement.
I can tell you this right now. You will lose many
individuals out there if you don't argue this thing on the
merits. We are open-minded and will be objective, but the
proponents and opponents must be objective in their own
analysis and give us the best arguments as to why we should be
for or against this particular agreement.
At this time, Mr. Chairman, I would like to yield the
balance of my time to Ms. Solis if that is proper and
acceptable.
Mr. Stearns. Sure. That is fine. Go ahead.
Ms. Solis. Thank you, Mr. Chairman, and thank you,
Congressman Gonzalez. I simply want to ask for unanimous
consent to provide my statement for the record. But I do want
to underscore that I am apposed to the DR-CAFTA agreement.
I am one of the few if--I think only Central American
Members of Congress by birth on my mother's side. I have been
to Nicaragua and I have been to Mexico, and I have seen what
has happened with NAFTA and also the results as of 2 years ago
in Nicaragua. And I see that there are many American
corporations there and know that there are many people that are
being oppressed, many young women who are being told that they
can come in and get jobs there and are asked to work 12 and 15
hours, are not allowed to organize, and are not given proper
healthcare and environmental protections.
I saw it for myself, and I have to tell you that I am happy
that we are having this hearing and would hope that we have
more discussion and debate on this. But I do want to register
my opposition and provide my statement for the record. Thank
you, Mr. Chairman.
[The prepared statement of Hon. Hilda Solis follows:]
Prepared Statement of Hon. Hilda L. Solis, a Representative in Congress
from the State of California
Mr. Chairman, I am strongly opposed to the Dominican Republic-
Central American Free Trade Agreement (DR-CAFTA).
DR-CAFTA is largely based on the North American Free Trade
Agreement (NAFTA). By signing DR-CAFTA, the Bush Administration has
ignored the mistakes of NAFTA. Ten years ago, NAFTA proponents promised
increased wages and economic development in the United States, Mexico,
and Canada and decreased migration. The agreement has failed on all
accounts.
DR-CAFTA may create jobs for women, but the working conditions are
unimaginable to the American public. The bulk of these jobs are in the
maquiladoras. I have visited Mexico and seen firsthand the devastating
consequences of NAFTA. In the maquiladora zone in Ciudad Juarez and
other border cities, wages are low, union organizing is suppressed, and
industrial pollution jeopardizes the health of workers and residents.
Women that work in the maquiladoras have reported forced pregnancy
testing, sexual harassment, and physical abuse. DR-CAFTA does not
require compliance with international labor rights and does not protect
women from discrimination.
Inadequate free trade agreements, such as NAFTA, not only hurt
women workers abroad, but also hurt American workers. Over 750,000 jobs
in the United States have been lost because of NAFTA. DR-CAFTA will
mean more job loss and wage decline for American workers.
U.S. Latino workers have been disproportionately hurt by NAFTA
because they tend to be concentrated in industries such as textiles and
other manufacturing sectors. While Latinos represent 12.6 percent of
the total U.S. workforce, they account for 26 percent of textile and
apparel industry workers. In California, Latinos make up an estimated
80 percent of the California garment industry.
Americans believe that we should NOT pursue future free trade
agreements similar to NAFTA. 51 percent of American voters oppose NAFTA
and claim it has hurt workers, wages and has cost us jobs. The League
of United Latin American Citizens, LULAC, the oldest and largest Latino
civil rights organization in the U.S., publicly opposes DR-CAFTA. LULAC
believes that DR-CAFTA ``falls short of being acceptable'' and fear
that CAFTA will unleash enormous loses for all workers, in the U.S. and
Central America.
As the only Member of Congress of Central American descent, I
understand the importance of supporting efforts to promote sustainable
development and preservation of the agricultural sector in that region.
However, U.S. policy towards Latin America should go beyond free trade
policies that do little to raise wages and working conditions for the
poor.
Those who oppose DR-CAFTA do so because of the irreparable harm it
will have to the economy and workers of Central America and the United
States. We can not allow the failures of NAFTA be reproduced through
DR-CAFTA.
Mr. Stearns. By unanimous consent, so ordered. Mr. Otter.
Mr. Otter. Thank you, Mr. Chairman. And thank you for your
leadership in calling this I think very, very important
hearing.
Long before I was a Member of Congress I was a businessman,
and I traveled to more than 80 foreign countries selling French
fries from Idaho all over the world. I know the importance of
free trade agreements, and I also understand the frustrations
of trade barriers. However, I have seen the harmful impacts of
some trade agreements, especially when they are not properly
enforced, such as the lack of enforcement regarding our present
North American Free Trade Agreement, otherwise known as NAFTA.
And other agreements that have led to tensions between the
United States and Canadian beef, potato, and softwood lumber
industries, as well as the Mexican bean and sugar beet
industries.
I am particularly concerned that the Dominican Republic-
Central America Free Trade Agreement, as currently drafted,
will significantly harm Idaho's agricultural industry and have
a severe impact on our economy. Sugar is the third largest crop
in Idaho, sugar beets. There more than 950 farming families
that grow sugar beets in Idaho and thousands of workers
employed by the three sugar processing facilities that we have
in the State. If DR-CAFTA passes, they are all in serious
jeopardy. Nay, nay say many. I say look across my border. I can
throw a rock to Nyssa, Oregon, which recently shut down its
plant.
Earlier this year a sugar factory closed down in Nyssa,
Oregon. It shut down because America's market already is
oversupplied by foreign sugar that existing trade agreements
require the United States to accept from 41 countries. That
town was devastated. Additional sugar from Central American
countries will further depress the market and hurt Idaho.
When people say we are just talking about sugar, they are
not recognizing the realities of farming where I come from. You
can only grow sugar beets 1 year out of three in Idaho. And
putting one commodity out of business, such as sugar, will only
cause overproduction in the other commodities like potatoes and
wheat.
Many commodity groups tell me that I should support this
agreement because it is good for agriculture. However, I cannot
support a proposal that it may provide a benefit for some,
while almost certain devastation to others.
The sugar industry is still trying to work out problems
created by the loopholes that we now see with NAFTA. And it
took us years to close up some of those holes. The sugar
provisions of DR-CAFTA send a dangerous precedent to our
foreign negotiation free trade agreements of the Americas.
Behind the CAFTA countries, 21 other sugar-exporting
countries are lined up for their gift from the United States.
Combined with these 21 countries, over 25 million tons of
sugar, nearly triple the U.S. consumption, are present.
The precedent that DR-CAFTA concession would set would make
it impossible for the U.S. sugar industry to survive--future
agreements. While I believe we should develop free trade
policies--it makes the field more level for U.S. farmers and
manufacturers--I will not support this or any other new trade
agreement that is harmful to my State. Thank you, Mr. Chairman.
Mr. Stearns. Thank you, gentleman. The gentleman from Ohio,
Mr. Strickland.
Mr. Strickland. Thank you, Mr. Chairman. I would like to
thank our witnesses for being here today to give us an
opportunity to flesh out the truth behind the proposed
agreement.
DR-CAFTA is based on the same misguided notions that NAFTA
was in 1994. NAFTA has failed. It has failed to fulfill the
promises made to the American people. And so I ask, why in the
hell would we proceed to follow a failed model? In the 11 years
since NAFTA was implemented, our trade deficit with Mexico and
Canada has grown by over 1200 percent according to the ``Wall
Street Journal.'' As many as one million good-paying jobs have
been displaced here at home. In my State of Ohio alone some
46,000 jobs have been lost as a result of NAFTA.
We should have learned out lesson of free trade agreements
negotiated under the Clinton and the Bush Administrations. At a
time when our total trade deficit stands at a whopping 6
percent of GDP, we cannot afford to continue to allow
unfettered advantage to our competitors.
The truth is that the Central American countries can
produce goods cheaper than we can; thus, NAFTA and CAFTA simply
allow companies to export jobs to cheaper labor and sidestep
labor laws and environmental standards. It is an unbalanced
equation that fails to benefit workers on either side.
The question that needs to be asked is what can we gain
from CAFTA? The $3 billion in additional exports the supporters
project would be a mere .25 percent of our total exports of
goods. The combined economies of all CAFTA partners are less
than the economy of Cleveland, Ohio. There is simply nothing
for us to gain, much to lose.
I visited Mexico during the last year. I talked to a worker
who works 9\1/2\ hours a day, 5 days a week. Her total take-
home pay is $38. American workers deserve more. We owe it to
them to secure their livelihoods, to protect their jobs, and
not jeopardize both to corporate special interests.
Eleven years ago, this country made a critical misstep by
enacting NAFTA. It is imperative that we stand firm against
CAFTA and prevent making the same mistake twice. I believe the
President should withdraw this agreement from consideration and
do what he was elected to do: set about rebuilding the American
economy. I yield back my time.
Mr. Stearns. Thank you, gentleman. I think our opening
statements are done.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman, for holding this timely hearing.
I would also like to thank the distinguished witness panels who
have joined us. They represent a diverse group of interests, all of
which would be impacted by the Dominican Republic-Central American Free
Trade Agreement (DR-CAFTA). I anticipate an open debate to help Members
as well as the public take an honest look at this proposed trade
agreement.
I have always supported fair trade, but as it is written, the DR-
CAFTA will not garner my support. The State of Wyoming, which I
represent, yields numerous superior exportable products which stand to
benefit from the increased visibility and expanded market access
provided by most Free Trade Agreements (FTA's). However, DR-CAFTA
stands to negatively impact two crucial sectors of Wyoming's
agriculture community, and for this reason, I cannot support this trade
agreement.
Despite what you might hear from detractors, sugar is currently the
sole commodity that operates at no cost to U.S. taxpayers. Previously
enacted trade agreements already require the U.S. to import 1.26
million tons of sugar annually. This forces American sugar growers to
store about 600,000 tons of sugar annually, at their own expense, due
to the fact their production is limited to a specificied market share.
Approving DR-CAFTA will more than double signatory nations' duty-free
access to the U.S. market, further jeopardizing the already strained
economic health of America's sugar farmers. Since 1996, 30% of all U.S.
sugar beet and cane mills have been forced out of business, including
one in my own state, and it just has to stop.
The DR-CAFTA is not advantageous to America's cattle producers,
either. Proponents have touted the reduced tariffs on high-priced cuts
of beef exported to Central America while ignoring the fact almost half
the citizens of this region live in poverty--by their standards. In
return, it would provide signatory nations with immediate duty-free
access to the U.S. market, despite the fact that none of these nations
is declared free of BSE, or ``mad cow disease.'' Without the full
implementation of mandatory Country of Origin Labeling, American
families have no way to choose domestic beef products. Simply put, DR-
CAFTA undermines the stability of American cattle producers and the
safety of consumers.
The goal of a free trade agreement is to promote the free exchange
of goods and services, and DR-CAFTA does not do so in a reciprocal
manner. This agreement will offer artificial competitive advantages to
foreign food producers and take away from the families in states like
Wyoming, who rely on agriculture for their stability and livelihood.
America can do better for it's producers, and it's time for Congress to
send this agreement back to the table.
Again, I thank the Chairman, and I yield back the balance of my
time.
______
Prepared Statement of Hon. Lee Terry, a Representative in Congress from
the State of Nebraska
Mr. Chairman, I want to thank you for holding this important
hearing on the Dominican Republic-Central America-U.S. Free Trade
Agreement (DR-CAFTA).
I am a strong supporter of free trade and the Administration's
efforts to remove trade barriers across the globe. As an agriculture-
based state, Nebraska and all of its citizens depend on opening new
markets and finding new customers around the globe. Exports help
support more than 47,000 Nebraska jobs--both on and off the farm in
food processing, storage, and transportation. In 2003, Nebraska's farm
cash receipts were $10.6 billion, and agricultural exports were
estimated at $3 billion, putting its reliance on agricultural exports
at 29 percent.
Like many others, I am concerned about America's shrinking trade
surplus in the agricultural sector. I support the DR-CAFTA efforts
because, overall, U.S. agricultural producers and food processors stand
to gain a great deal from the increased exports created by the
agreement.
If DR-CAFTA is rejected, American farm exports will continue to
face steep tariffs on their exports. The average agricultural tariff
applied to U.S. exports to these countries exceeds 11 percent, and is
much higher for key Nebraska products such as beef (tariffs ranging
from 15-30 percent), pork (15-47 percent), and corn (as high as 45
percent). By contrast, over 99 percent of Central American and
Dominican agricultural products already enter the U.S. market duty
free. The U.S. currently has a negative agricultural trade balance with
the six DR-CAFTA nations for this very reason.
The DR-CAFTA would open a new market of 44 million costumers to
U.S. goods, including Nebraska products. More than 80 percent of U.S.
exports will gain immediately duty-free access to the DR-CAFTA
countries, with remaining tariffs phased-out over 10 years.
The American Farm Bureau estimates that DR-CAFTA could expand U.S.
farm exports by $1.5 billion a year. This explains why more than 50
agricultural industry and farm groups support passage of the DR-CAFTA.
Nebraska's manufacturers would also benefit, especially in sectors like
information technology products, construction and agricultural
equipment, pharmaceuticals, and other specialty equipment.
Central America and the Dominican Republic comprise the second-
largest U.S. export market in Latin America. With passage of the DR-
CAFTA, the United States will increase its global competitiveness--
critical at a time that the U.S. is facing a new competitive challenge
from Asian imports.
I am also encouraged to learn that a recent study by the
International Labor Organization (ILO) demonstrated that labor laws on
the book in DR-CAFTA countries are generally in line with ILO core
labor standards. Moreover, this agreement contains ground-breaking
environmental provisions, including a first-ever citizen participation
process designed to correct trade-related environmental problems. Ten
environmental non-governmental organizations from the region have
endorsed the trade agreement.
While trade is not the panacea for every economic woe, I believe
that free trade, combined the strong American work ethic, has provided
the citizens of the United States the highest standard of living in the
world. I believe the DR-CAFTA will help us continue our high standard
of living, and boost America's--and Nebraska's--competitiveness in the
global economy.
Thank you, Mr. Chairman. And I look forward to hearing from today's
witnesses.
______
Prepared Statement of Hon. Mike Rogers, a Representative in Congress
from the State of Michigan
Mr. Chairman, thank you for calling today's hearing on the Central
American Free Trade Agreement. It is incredibly important for this
committee to exercise its trade jurisdiction.
Mr. Chairman free and fair trade helps American workers by opening
foreign markets and helps American consumers by lowering prices.
However, for trade to work, it must actually be free and fair trade.
America has the strongest and most diverse workforce in the world, and
we should continue to knock down trade barriers to American products
overseas.
The CAFTA does knock down trade barriers. As Ms. Vargo notes in her
submitted testimony, nearly 80 percent of imports from CAFTA nations
already enter the United States duty free. However, American made goods
and services do not receive equitable treatment from CAFTA nations. If
we are to continue to manufacture in America, we must stop allowing
foreign governments to tax American made products out of the
marketplace.
Even while we work to open new markets for American made goods, we
must continue to address the actions of some of our so-called trading
``partners.'' For years, American manufacturers have been able to stay
ahead of foreign competition largely because of their commitment to
quality and innovation. However, that commitment serves them little
benefit when their own government is unable to protect American
innovations. Press reports of rampant foreign manufacturing piracy on
everything from brake pads to DVDs has made it clear that many of
America's trading partners are not yet committed to enforcing the
intellectual property laws they agree to when signing trade agreements
with the Unites States or as a condition of joining the World Trade
Organization.
Mr. Chairman, the threat of intellectual property theft and
outright piracy is a growing problem. For that reason, the House of
Representatives has in past appropriations bills sought to increase
funding help our trade enforcement officers enforce trade agreements
and international copyright law. I believe that our government is
sincere in its desire to carry this important fight forward. However, I
am concerned with how effectively we as a government and as a nation
have actually waged this battle. I hope that during their testimony and
in replying to the questions posed to them today's witnesses can share
with this committee the status of the United States trade enforcement
record, and how we can reasonably expect to enforce the gains
negotiated in the CAFTA.
Mr. Stearns. We welcome the assistant U.S. trade
representative for the Americas to the table. It is Ms. Regina
K. Vargo, Office of U.S. Trade Representative, for your opening
statement. And I would--just to clarify to all the members, we
are here to learn and to look at this agreement objectively and
see the pros and cons. And so obviously this morning you are
the lead person. And so we welcome you and we welcome your
opening statement.
STATEMENT OF REGINA K. VARGO, ASSISTANT U.S. TRADE
REPRESENTATIVE FOR THE AMERICAS, OFFICE OF THE U.S. TRADE
REPRESENTATIVE
Ms. Regina Vargo. Okay, thank you very much, Chairman
Stearns, Congresswoman Schakowsky, and members of the
committee. I am pleased to have the opportunity to testify
before you today on the free trade agreement with Central
America and the Dominican Republic, or the CAFTA.
As the chief negotiator of this agreement, I would like to
personally thank the subcommittee for focusing on the CAFTA
today as we begin the critical legislative process toward
implementation of this agreement. I hope I can answer any
questions that you may have regarding the many benefits that
CAFTA will bring to U.S. exporters, workers, farmers, ranchers,
and consumers.
CAFTA marks the successful culmination of a decades-long
American policy of promoting economic reform and democracy in
Central America. CAFTA offers us the best opportunity to
strengthen the economic ties we already have with these nations
and to reinforce their progress toward economic, political, and
social reform.
At the same time, we have much to gain from this agreement.
Collectively, Central America and the Dominican Republic make
up the second largest U.S. export market in Latin America with
more than $15.7 billion in U.S. exports in 2004. These
countries form a larger export market than Brazil and a larger
export market than Russia, India, and Indonesia combined.
The American Farm Bureau Federation estimates that CAFTA
could expand U.S. farm exports by $1.5 billion a year, which
would represent nearly a doubling of our current agricultural
exports to the region. Manufacturers would also benefit,
especially in sectors such as information technology products,
agricultural and construction equipment, paper products,
pharmaceuticals, and medical and scientific equipment. The U.S.
Chamber of Commerce estimates that U.S. sales to the region
would expand by more than $3 billion in the first year of the
CAFTA.
However, we currently face an unlevel playing field. The
fact is, we already have free trade with Central America and
the Dominican Republic, but it is one-way free trade. Nearly 80
percent of industrial imports from Central America and the
Dominican Republic already enter the United States duty-free.
In agriculture we estimate that 99 percent of Central America's
and the Dominican Republic's farm exports to the United States
are duty-free.
CAFTA will level the playing field for American workers and
farmers. It will further open regional markets to our products
and services, which currently face high-average tariffs and
non-tariff barriers.
More than 80 percent of U.S. exports of consumer and
industrial goods will become duty-free immediately under this
agreement. And more than half of current U.S. farm exports to
Central America will become duty-free immediately, including
high-quality cuts of beef, cotton, wheat, soybeans, key fruits
and vegetables, and processed food products, among others.
U.S. farm products that will benefit from improved market
access include pork, dry beans, vegetable oil, poultry, rice,
corn, and dairy products. Every major U.S. farm commodity group
but one--nearly 60 agricultural organizations--have stated
their strong support for CAFTA.
In services, the Dominican Republic and the Central
American countries will accord substantial market access across
their entire services regime offering new access in
telecommunications, express delivery, computer and related
services, tourism, energy, transport, construction and
engineering, financial services, insurance, audiovisual and
entertainment, professional, environmental, and other sectors.
This is also a trade agreement for the digital age,
providing state-of-the-art protections and nondiscriminatory
treatment for digital products such as U.S. software, music,
text, and videos. Protections for U.S. patents, trademarks, and
trade secrets are strengthened. And this agreement provides
strong anti-corruption measures in government contracting and
other measures affecting international trade and investment.
Textiles and apparel is an important component of our trade
with the region, which is our second largest market for U.S.
fabric and yarn. CAFTA represents a critical element in our
domestic industry's ability to compete with Asia. Without the
tariff preferences and rules of origins of CAFTA, apparel
companies may well move production to China, where they will be
more likely to buy exports from Asian suppliers, rather than
from producers here in the United States. A tee-shirt that is
made in Honduras is likely to contain well over 50 percent U.S.
content, while a tee-shirt made in China is likely to contain
very little or no U.S. content. To keep our customers for U.S.
yarn and fabric and U.S. jobs in that sector, we need to pass
CAFTA soon.
I know that there is a considerable interest in the
Congress with regard to workers' rights and labor standards in
Central America and the Dominican Republic. We share the goal
of seeing the continuation of real, meaningful improvements in
worker rights in the region. In CAFTA, we focus on the chief
problem in these countries, the need to improve enforcement of
domestic labor laws.
At the start of the negotiations, the Central American
countries, and later the Dominican Republic, requested a study
by the International Labor Organization of the labor situation
in these countries. The ILO study demonstrated that the labor
laws on the books in Central America and the Dominican Republic
are generally in line with ILO core labor standards. But let us
be clear. The enforcement of labor laws in the region needs
more attention and more resources.
The Central Americans and the Dominicans themselves
acknowledge this in a paper that they released recently that
was produced jointly with the Inter-American Development Bank
and by the Central American trade ministers and labor
ministers. It is a candid assessment of past problems, recent
improvements, and recommendations for further actions.
CAFTA is specifically designed to respond to the problem at
hand by improving enforcement and expanding resources with a
comprehensive three-part strategy. First, the agreement
requires that countries not fail to effectively enforce their
labor laws. As the New York Times said in an editorial last
November, ``CAFTA actually goes further than the pact with
Jordan, since penalty fines collected for not enforcing labor
laws would be sent back to the offending country to fix the
offense.'' And the use of those fines is subject to agreement
by the United States.
Second, the countries in the region have taken numerous
concrete steps to improve labor law enforcement, including
hiring more labor inspectors, appointing special labor
prosecutors, and prosecuting perpetrators of violence against
trade unionists. We are pleased that the labor and trade
ministers recently announced a series of additional and
specific recommendations to further improve labor law
enforcement.
Finally, we need to provide assistance to build the
capacity of these countries to enforce their laws more
effectively and to strengthen their enforcement institutions
and infrastructure. The Department of Labor and USAID have some
important ongoing initiatives, but most notably, Congress has
recently appropriated $20 million for fiscal year 2005 for
labor and environmental trade capacity building. The
administration intends to work with Congress and with the CAFTA
countries to target these funds toward the areas of greatest
need.
We have also broken new ground on the environmental side.
The CAFTA environmental provisions and the associated
Environmental Cooperation Agreement are the most forward-
leaning trade and environmental package ever. We have included
several innovations in the environment package. First, working
with Senator Baucus, we developed a new public submissions
mechanism that will allow the interested public, including
NGO's, an opportunity to challenge a party's failure to enforce
its environmental laws and to obtain an independent review of
their submission. CAFTA is the first trade agreement ever to
include this kind of mechanism in its core provisions.
Second, the parallel environmental cooperation agreement
builds on previous capacity-building efforts in the region but
breaks them down in several ways. For the first time ever, the
agreement provides for the establishment of short-, mid-, and
long-term benchmarks for measuring progress in meeting
environmental goals and also provides for independent
monitoring by outside organizations of success in meeting these
benchmarks.
Finally, we are taking steps to ensure that capacity-
building efforts are adequately funded. The administration is
considering, as I said, how to allocate the $20 million in
funding for this fiscal year.
Last month 10 Central American environmental NGO's endorsed
the CAFTA and urged its passage. These groups praised the CAFTA
environmental package for the opportunities it provides to them
to have a new voice in pressing for environmental progress in
the region.
In closing, Mr. Chairman, the last 20 years have been a
sometimes difficult road to democracy in this region. But
today, we have neighbors in Central America and the Dominican
Republic who want to trade goods, not guns, across their
borders. We want to replace chaos with commerce and to use
CAFTA as an important tool of reform that will deepen and
strengthen democracy.
Working closely with the Congress, we have negotiated a
landmark free trade agreement. We believe CAFTA meets the
objectives that Congress set in the Trade Act. It is strongly
in the economic and national interests of the United States. We
hope the Congress will agree that America should not turn its
back on struggling democracies that want a closer economic
relationship that will benefit citizens in all our countries.
CAFTA makes eminent sense for America and for Central America
and the Dominican Republic. Thank you.
[The prepared statement of Regina K. Vargo follows:]
Prepared Statement of Regina Vargo, Assistant United States Trade
Representative for the Americas
INTRODUCTION
Chairman Stearns, Congresswoman Schakowsky, and Members of the
Committee, I am pleased to have the opportunity to testify before you
today on the free trade agreement with Central America and the
Dominican Republic, or CAFTA. As the chief negotiator of this
agreement, I would like to personally thank the Subcommittee for
focusing on the CAFTA today as we begin the critical legislative
process toward implementation of this agreement. I hope that I can
answer any questions you may have regarding the many benefits that
CAFTA will bring to U.S. exporters, workers, farmers, ranchers and
consumers.
I would like to begin today with a bit of historical context.
Twenty years ago, Congress held several hearings on the topic of
Central America. But the Administration witnesses were not from USTR,
and the topics had little to do with economics. In February 1985, the
House Foreign Affairs Committee held a hearing about developments in
Guatemala, where an undemocratic military government ruled and civil
war raged. The following month, the House heard testimony from Pentagon
and State Department officials about U.S. military assistance to El
Salvador, which was then fighting an armed Communist insurgency. In
1985, to the extent that Congress or the American people paid attention
to Central America, it was largely because of violence, dictatorships,
and civil war.
It is an extraordinary sign of the progress made in Central America
that we meet here today--twenty years later--to discuss a free trade
agreement--an economic partnership with these countries. Today, the
Dominican Republic and the nations of Central America are all
democracies. Elected leaders are embracing freedom and economic reform,
fighting corruption, strengthening the rule of law and battling crime,
and supporting America in the war on terrorism. And they want to help
cement their courageous moves toward democracy and free markets by
signing a free trade agreement with their neighbor to the North, the
United States.
CAFTA marks the successful culmination of a decades-long American
policy of promoting economic reform and democracy in Central America.
President Bush strongly believes that America should stand with those
in our Hemisphere--and the world--who stand for economic freedom. CAFTA
offers us the best opportunity to strengthen the economic ties we
already have with these nations, and to reinforce their progress toward
economic, political and social reform.
But CAFTA is not an act of unilateral altruism on the part of the
United States. We have much to gain from this trade agreement: access
to a large and growing market of 45 million consumers close to our
border, an opportunity to level the playing field for American workers
and farmers who today must cope with one-way free trade from Central
America and the Dominican Republic without a reciprocal chance to
compete.
The agreement that we are here to consider today is the result of
over three years of hard work and close cooperation between the
Administration and the Congress, which began when President Bush
announced his intent to negotiate a free trade agreement with Central
America in January 2002. Using guidance from Trade Promotion Authority,
USTR formally consulted closely with committees of jurisdiction before
and after every round of negotiations, shared proposed text of the
agreement with staff and Members prior to presenting texts in the
negotiations. Former USTR Robert Zoellick, Acting USTR Peter Allgeier,
myself, and other negotiators consulted with the Congressional
Oversight Group and with Members on an individual basis. We took all
views into consideration during each step of the negotiations, and
greatly value the input provided by the Congress for this agreement.
Our dialog with the Congress continues today, and I welcome this
opportunity to talk with all Members about CAFTA.
In concluding this FTA, our objective, which we feel confident that
we have met, was to follow the negotiating objectives laid out by
Congress in the bipartisan Trade Act of 2002 to strike a comprehensive
and commercially meaningful agreement that will benefit U.S. workers,
businesses, farmers, investors and consumers. At the same time, these
complex negotiations took careful consideration of import sensitivities
of the United States, many of which were communicated to us by Members
of Congress. We worked hard to take into account all concerns raised
with us by Members of Congress, and believe that we struck careful
balances to reflect these interests.
So today I would like to discuss the reasons why we believe CAFTA
is strongly in the national interest of the United States, and why we
want to work with Congress to pass this trade agreement into law.
SMALL COUNTRIES, BIG MARKETS
Central America and the Dominican Republic are very large export
markets for the United States. Collectively, these countries make up
the second largest U.S. export market in Latin America, with more than
$15.7 billion in U.S. exports in 2004. For some key states, for example
Florida and North Carolina, the region is a top-three export
destination for Made-in-USA products. Central America and the Dominican
Republic form a larger export market than Brazil, a larger export
market than Australia, and a larger export market than Russia, India
and Indonesia combined.
While the Central America countries and the Dominican Republic are
physically small, they are clearly large markets for U.S. products and
services. The American Farm Bureau Federation estimates CAFTA could
expand U.S. farm exports by $1.5 billion a year, which would represent
nearly a doubling of our current agricultural exports to the region.
Manufacturers would also benefit, especially in sectors such as
information technology products, agricultural and construction
equipment, paper products, pharmaceuticals, and medical and scientific
equipment. The U.S. Chamber of Commerce has done a number of studies of
the potential economic impact of CAFTA in just eight key U.S. states,
and estimates that U.S. sales to the region would expand by more than
$3 billion in the first year of CAFTA. From soft drinks to software,
from pork to paper products, the region is a voracious consumer of U.S.
products and services. In some areas, textile yarn and fabric for
example, the region is second only to Mexico as a worldwide consumer of
U.S. exports.
leveling the playing field: new opportunities for u.s. workers, farmers
But while these Central American countries and the Dominican
Republic buy many goods and services from the United States, we
currently face an unlevel playing field. Most Americans probably do not
realize that we already have free trade with Central America and the
Dominican Republic, but it is one-way free trade. Under unilateral
preference programs begun by President Reagan and expanded under
President Clinton with broad bipartisan support, nearly 80 percent of
imports from Central America and the Dominican Republic already enter
the United States duty-free. In agriculture, that percentage is even
higher: we estimate that 99% of Central America's and the Dominican
Republic's farm exports to the United States are duty-free. For the
countries of the region, CAFTA will lock in those benefits and expand
on them, helping to promote U.S. investment in the region.
But more importantly, CAFTA will level the playing field for
American workers and farmers. It will further open regional markets to
our products and services, which currently face very high average
tariffs or non-tariff barriers. For example, today the average Central
American applied tariff on motor vehicles is 11.1%, while U.S. applied
tariffs on imports from Central America are zero. The regional tariff
on steel averages 16.3%, but the U.S. tariff is zero. The regional
tariff on chemicals is 12.8%, but the U.S. tariff is zero. The same
situation exists in agriculture: Central American and Dominican tariffs
on U.S. vegetables faced a tariff ranging from 15% to 47%; ours are
zero. U.S. fruits and nuts faced a tariff as high as 25% while--
products in this same sector enter our market duty free. The chief
effect of CAFTA is not to further open our market, but rather to tear
down barriers to our products and services in Central America and the
Dominican Republic.
CAFTA will create new opportunities for U.S. workers and
manufacturers. More than 80 percent of U.S. exports of consumer and
industrial goods will become duty-free immediately, with remaining
tariffs phased out over 10 years.
The agreement will also expand markets for U.S. farmers and
ranchers. More than half of current U.S. farm exports to Central
America will become duty-free immediately, including high quality cuts
of beef, cotton, wheat, soybeans, key fruits and vegetables, and
processed food products among others. Tariffs on most remaining U.S.
farm products will be phased out within 15 years. U.S. farm products
that will benefit from improved market access include pork, dry beans,
vegetable oil, poultry, rice, corn, and dairy products. It is
significant that every major U.S. farm commodity group but one has
stated its strong support for CAFTA.
In the important area of services, the Dominican Republic and the
Central American countries will accord substantial market access across
their entire services regime, offering new access in sectors such as
telecommunications, express delivery, computer and related services,
tourism, energy, transport, construction and engineering, financial
services, insurance, audio/visual and entertainment, professional,
environmental, and other sectors. The Dominican Republic and the
Central American countries made significant commitments regarding their
``dealer protection'' regimes. These commitments will help ensure that
U.S. firms are not locked into exclusive or uneconomical distributor
arrangements.
This is also a trade agreement for the digital age, providing
state-of-the-art protections and non-discriminatory treatment for
digital products such as U.S. software, music, text, and videos.
Protections for U.S. patents, trademarks and trade secrets are
strengthened, and several are Chile-plus provisions, such as strong
patent protection by 2007 for certain modified plant varieties.
And this agreement breaks new ground, providing strong anti-
corruption measures in government contracting and other matters
affecting international trade or investment. U.S. firms are guaranteed
a fair and transparent process to sell goods and services to a wide
range of Central American and Dominican Republic government entities.
The agreement's dispute settlement mechanisms call for open public
hearings, public access to documents, and the opportunity for third
parties to submit views, with limited exceptions to protect
confidential information. Transparency in customs operations will aid
express delivery shipments and will require more open and public
processes for customs rulings and administration.
TEXTILES
Textiles and apparel is an important component of our trade with
the region and deserves special mention. The Administration strongly
believes that CAFTA is not a threat to U.S. textile producers but in
fact represents a critical element in our domestic industry's ability
to compete with Asia.
Today, garment factories in Central America and the Dominican
Republic are very large consumers of U.S.-made textile fabric and yarn.
The extensive use of U.S. inputs in the regional apparel business means
that Central America and the Dominican Republic actually constitute the
second-largest world export market for U.S. textile yarn and fabric,
behind only Mexico. For states like North Carolina, exports of textile
fabric and yarn to garment makers in the region make a small country
like Honduras that state's number one export market in the world. CAFTA
will help keep it that way, by delivering tariff preference benefits
for clothing made in the region that uses U.S. yarn and fabric.
Without CAFTA, our domestic yarn and textile industry would likely
lose one of its biggest customers. Worldwide quotas on textiles and
apparel expired at the end of last year, meaning that the hemispheric
industry faces a new collective threat from Asia. Without the tariff
preference benefits of CAFTA, apparel companies may well move
production to China. Indeed, the uncertainty to date about CAFTA has
already caused a number of apparel firms to shut down operations in
Central America and move them to China; as many as 10,000 workers may
already have already lost their jobs. In China, there are no special
trade incentives for apparel producers to buy U.S. yarn and fabric. In
fact, they are much more likely to buy inputs from Asian suppliers,
rather than producers here in the United States. That's why a T-shirt
that is Made in Honduras is likely to contain well over 50% U.S.
content, while a T-shirt Made in China is likely to contain very little
U.S. content at all.
To keep our customers for U.S. yarn and fabric, we need to keep
them close to home. And to keep them close to home, we need to pass
CAFTA soon.
LABOR
I know that there is considerable interest in Congress with regard
to worker rights and labor standards in Central America and the
Dominican Republic. We share that interest, and I believe we share the
goal of seeing the continuation of real, meaningful improvements in
worker rights in the region. I believe we should focus our strategy,
and our attention and efforts, on the chief problem in these countries:
the need to improve enforcement of domestic labor laws.
The Central American countries, and later the Dominican Republic,
requested a study by the International Labor Organization (ILO) of the
labor situation in their countries. The ILO study demonstrated that
labor laws on the books in Central America and the Dominican Republic,
are generally in line with ILO core labor standards. The
Administration's own, more detailed analysis of the labor rights
situation in these six countries confirms that their labor laws are
generally ILO-consistent. Indeed, labor protections on the books in the
region are broadly similar to labor laws in Morocco, and in some areas
(e.g., child labor) are stronger. Congress gave broad bipartisan
support to an FTA with Morocco in 2004.
But let's be clear: the enforcement of labor laws in the region
needs more attention and resources. Our analysis shows this, and the
Central Americans and Dominicans themselves acknowledge this, as the
White Paper recently released by regional Labor and Trade Ministers
clearly demonstrates. CAFTA is specifically designed to respond to the
problem at hand by improving enforcement and expanding resources with a
comprehensive, three-part strategy:
First, the agreement requires that countries not fail to effectively
enforce their labor laws. If they consistently fail to enforce
those laws in a manner that affects our trade, then they face
the prospect of monetary penalties that will be directed to
solve the problem, or potentially face the loss of preferential
trade benefits. As the New York Times said in an editorial on
November 24, 2004, ``Cafta actually goes further than the pact
with Jordan, since penalty fines collected for not enforcing
labor laws would be sent back to the offending country to fix
the offense.'' Exactly right.
Second, it's important to note that countries in the region have
already taken numerous, concrete steps to improve labor law
enforcement, including hiring more labor inspectors, appointing
special labor prosecutors, prosecuting perpetrators of violence
against trade unionists, and cutting the backlog of cases in
their labor courts. There is much more to do, however. So we
were pleased that Labor and Trade Ministers recently announced
a series of additional and specific recommendations to further
improve labor law enforcement.
Finally, we need to provide assistance to build the capacity of these
countries to enforce their laws more effectively and to
strengthen their enforcement institutions and infrastructure.
We're pleased that the Department of Labor committed $7.7
million to a multi-year technical assistance effort. Congress
has now appropriated $20 million for FY05 for ``labor
cooperation, capacity building on fundamental labor rights and
the elimination of child labor, and improvement in labor
administration'', as well as for important environmental
cooperation activities in this region. The Administration
intends to work with the Congress and with the CAFTA countries
to target these funds toward the areas of greatest need, and we
hope that the funds provided for FY05 are only a first step in
an ongoing commitment by the Congress to fund labor capacity-
building in this region.
Our comprehensive strategy does not attempt to minimize the
challenges we faced: We negotiated a fully TPA-consistent labor
chapter, we worked with the Dominican Republic and the Central American
countries to make real worker rights progress during the negotiations,
and there is a strategy for long-term capacity building. This concrete,
real-world effort is directed at where the problem lies: problems with
the enforcement of existing laws in Central America and the Dominican
Republic. By contrast, a strategy of defeating CAFTA would preserve the
status quo, and very likely set back progress to date. Defeating CAFTA
will do nothing to improve working conditions for a single worker in
Central America or the Dominican Republic, and in fact will have the
opposite effect, as tens of thousands of Central Americans and
Dominicans stand to lose their jobs to China if the United States turns
its back on CAFTA. We believe that one of the best ways to improve
working conditions in Central America and the Dominican Republic is to
have strong economic growth, combined with a comprehensive and targeted
strategy to build the capacity of these countries to enforce their
labor laws.
ENVIRONMENT
We have also broken new ground on the environment side. I believe
that the CAFTA environmental provisions, and the associated
Environmental Cooperation Agreement, are the most forward-leaning trade
and environment package ever. We have worked closely with Congress in
developing our approach and developing many of its unique features.
The CAFTA countries have come a long way in the last decade in
putting in place good environmental laws as well as the beginning of a
complete environmental legal regime, but enforcement in many cases
remains a significant challenge. There is also the need for greater
transparency and involvement of civil society in environmental
decision-making. To address these concerns, in addition to continuing
existing Administration efforts to help the CAFTA countries further
develop their legal regimes, we have included several innovations in
the environment package:
First, we have developed a new public submissions mechanism that will
allow the interested public, including NGOs, an opportunity to
challenge a Party's failure to enforce its environmental laws
and to obtain an independent review of their submissions. CAFTA
is the first trade agreement ever to include this kind of
mechanism in its core provisions, and it will give civil
society in the region a new voice in working to improve
environmental enforcement in the region. Just a few weeks ago,
in a ceremony taking place at the Organization of American
States, we and our Central American and Dominican Republic
counterparts signed a landmark agreement that designates a new
environmental unit within SIECA--the Organization for Central
American Economic Integration--as the secretariat to implement
these provisions.
Second, the parallel environmental cooperation agreement (also signed
at the OAS ceremony) builds on previous capacity-building
efforts in the region, but breaks new ground in several ways.
For the first time ever, the agreement provides for the
establishment of short-, medium- and long-term benchmarks for
measuring progress in meeting environmental goals. The
agreement also provides for independent monitoring by outside
organizations of success in meeting these benchmarks. Initial
priority areas for cooperation include reinforcing capacity to
implement and enforce environmental laws, including habitat
conservation, trade in endangered species and treatment of
hazardous wastes.
Finally, we are taking steps to ensure that capacity building efforts
are adequately funded. The Administration has initiated a
Deputies process to oversee environmental cooperation efforts
linked with all the FTAs and to organize an inter-agency budget
process to promote coordination across interested federal
agencies. The Administration also is considering how to
allocate the $20 million in FY05 funding between labor and
environment activities.
The response in the region is already gratifying. Last month ten
Central American NGOs sent a letter to former U.S. Trade Representative
Zoellick and the trade ministers of our Central American and Dominican
Republic partners, expressing their support for the CAFTA and urging
its passage. These groups praised the CAFTA environmental package and
the opportunities it provides for them to have a new voice in pressing
for environmental progress in the region. The governments are also
doing their part to prepare the way for CAFTA's implementation. With
our participation, they have held numerous public outreach sessions in
the region, with more to follow. And just to take some of the most
recent examples of concrete action: Nicaragua has created a new office
on trade and environment within its environment ministry as the result
of the CAFTA, while El Salvador has established a new advisory
committee on trade and environment issues, with NGOs on the committee,
very much like our own Trade and Environment Policy Advisory Committee
(TEPAC). In fact, the Environment Chapter requires all of the CAFTA-DR
countries to establish such advisory committees.
Thus, we are poised to make a real difference in strengthening
civil society and environmental protection in Central America and the
Dominican Republic. We should not let this historic opportunity pass.
SUGAR: HANDLED WITH CARE
We are aware that some members of Congress have expressed concerns
with U.S. sectors that are sensitive to import competition, such as
sugar. If I had to describe in a phrase how we handled those issues in
the agreement, it would be, ``handled with care.''
On sugar, it is important to remember that there will be no change
in the above-quota U.S. duty on sugar. This was an important
accomplishment that recognizes the sensitivity of this important sector
of the U.S. farm economy. CAFTA will not have a destabilizing effect on
the U.S. sugar program, because even with a modest increase under
CAFTA, U.S. imports will still fall comfortably below levels set for
sugar imports in the Farm Bill.
In other agreements, we have also been sensitive to this issue. In
our FTA with Australia, sugar was excluded entirely. In our agreements
with Chile and Morocco, we have provisions that effectively will result
in no change in the levels of sugar imports from those nations.
For Central America and the Dominican Republic we agreed to a very
small and very limited expansion of the quota for sugar imports from
these countries.
The total increased quota amount is equivalent to only about one
day's worth of U.S. sugar production. We produce more than 7 million
metric tons of sugar in the United States annually. The increased
amounts under CAFTA are only a little over 100,000 metric tons. Even
after 15 years, increased sugar imports from Central America and the
Dominican Republic will amount to only about 1.7% of U.S. consumption.
In addition, the Agreement includes a mechanism that allows the
United States, at our option, to provide alternative compensation to
CAFTA country exporters in place of imports of sugar.
To put sugar imports under CAFTA into perspective, the increased
imports in the first year under CAFTA amount to about a teaspoon and
half per week per American. That compares with average consumption of
10-20 teaspoons of added sugar per day for most Americans. The amount
of sugar allowed into the United States under CAFTA is minuscule.
Claims that the CAFTA will harm the U.S. sugar industry are simply
wrong.
A UNIQUE CHANCE TO STRENGTHEN DEMOCRACY
Mr. Chairman, the last twenty years has been a sometimes difficult
road to democracy in El Salvador, Guatemala, Nicaragua, and other
countries in the region. But today we have neighbors in Central America
and the Dominican Republic who want to trade goods, not guns, across
their borders. They want to replace chaos with commerce, and to use
CAFTA as an important tool of reform that will help deepen and
strengthen democracy.
Working closely with the Congress, we have negotiated a landmark
free trade agreement that will open these large and growing markets to
our goods and services. CAFTA will level the playing field, helping our
workers and farmers sell to countries that already enjoy virtually
unlimited access to the United States market. The agreement will help
the U.S. textile industry unite with some of its largest world
customers to better compete against imports from China and other Asian
competitors. It contains a focused, results-oriented strategy that
will--when combined with a strong Congressional commitment to capacity-
building--produce real improvements in working conditions and
environmental protection in the region. And it handles sensitive
commodities with great care.
We believe CAFTA meets the objectives set by Congress in the Trade
Act. It is strongly in the economic and national interests of the
United States. We hope the Congress will agree that America should not
turn its back on struggling democracies that want a closer economic
relationship that will benefit workers in all our countries. CAFTA
makes eminent sense for America, and for Central America and the
Dominican Republic.
Thank you.
Mr. Stearns. I thank you. And I will start with the
questions. I certainly want to say that I think you made an
eloquent case. We normally allow 5 minutes for opening
statements, and certainly we wanted to give you extra time.
Also to commend Rob Portman, who is going to be the next trade
representative, who we have great respect for. And out of
respect for him and him talking to me, I sort of felt that it
was important for you to get your whole statement on. And I
think you did a very good job.
When you look at what you say and you--just from the
outside, and you say well, look, we are allowing these goods to
come in here now duty-free, I think you said 80 percent, and so
by golly, all we are going to do is allow now American goods to
get in there without tariffs. Why would anybody be against it?
It just sounds so logical. And the fact that you point out that
you have had years. How long have you been negotiating CAFTA
would you say? I mean, I know it is part of the CBI Agreement
from the 1980's, but I mean, how would you----
Ms. Regina Vargo. We spent a year, Mr. Chairman, on
preparatory work, going over the kinds of obligations we like
to see in agreements with the countries. We were in a year of
active negotiation with the Central American countries, and
then another 3 months with the Dominican Republic.
Mr. Stearns. So you have done the best effort; you had the
most comprehensive teams; you worked this out. You can't expect
it to be perfect so people can hit you around the edges. But I
think what you are going to hear, people are going to go back
to NAFTA. So I think you are going to have to also be prepared
this morning, this afternoon, whatever time it is, to talk
about NAFTA. And I think the argument can be made that the
NAFTA agreement provided more wealth to Mexico. I think no
matter who is on either side would probably agree that that was
true. The problem is that the wealth was not proportional to
the middle class or perhaps to the lower-wage people. So that
is what the people who are against this agreement will argue,
why should we vote for this CAFTA when we have NAFTA where we
saw yes, the wealth increased, but it did not provide the
wealth for the people who are in the middle class or lower?
So the argument to you is, is it true that more wealth was
provided for Mexico because of NAFTA? I think the answer is
yes, right?
Ms. Regina Vargo. Yes, it is.
Mr. Stearns. In your opinion, do you think the argument
that the wealth went to the upper 10 percent and not to the
rest of Mexico is a valid argument at all? Can you make that
statement with some objectivity that the wealth that was
created in Mexico went to the upper people and not to the
people themselves, the substantial working labor force?
Ms. Regina Vargo. The discussion on NAFTA sometimes gets
complicated by----
Mr. Stearns. Oh, I know----
Ms. Regina Vargo. [continuing] people----
Mr. Stearns. [continuing] and that is--I am----
Ms. Regina Vargo. No----
Mr. Stearns. [continuing] trying to keep it very simple.
Ms. Regina Vargo. No, I just wanted to say by the peso
crisis that happened----
Mr. Stearns. Okay.
Ms. Regina Vargo. [continuing] shortly after the----
Mr. Stearns. Right.
Ms. Regina Vargo. [continuing] agreement went into effect.
But in fact when you look at the period from before NAFTA to
the current day, poverty rates are lower now, not greatly, but
lower now than they were then. And with respect to income
levels, the World Bank has found that the greatest reduction in
poverty has been at the extreme.
Mr. Stearns. Okay, well, that is what you need to make,
because, you know, as Members of Congress who voted for or
against it, you say well, how did NAFTA go? And if NAFTA went
pretty well, there is really no reason we shouldn't pass this.
So I think on the stump you are going to have to explain that.
There is also a feeling that disagreement has broader
implications than just the economic. It will allow Americans to
have duty-free commerce into Central America, but you alluded
to the fact that this will also help to stabilize countries and
has geopolitical considerations, not to mention the fact that
you got these people to agree, and if Congress turns it down,
then we have got to go back to these countries. And they say
well, gee whiz, you had an agreement with Australia, you had
agreement with all these other--Jordan, all these other
countries. Why didn't you have an agreement in your own
hemisphere? But you might talk to us a little bit about not
just the economic and the things you talked about, more
inspectors, enforcement institutions, but is there also
geopolitical reasons for passing this agreement?
Ms. Regina Vargo. Well, Mr. Chairman, there has been a
strong geopolitical reason for our interest in this region for
quite some time. And in fact that was the basis for which the
Congress, in a bipartisan way, passed the Caribbean Basin
Initiative initially, back around 1985 I believe it was, that
provided them with one-way duty access into the United States.
This was with the hope that additional market access could help
generate some sustainable economic growth in the region that
would be more beneficial to creating these--reinforcing these
fledgling--what we wanted to be fledgling democracies, and at
the time was actually quite a period of chaos in the region
with their own internal civil wars, the guerillas fighting, et
cetera.
What we built under CBI is we have been able to reinforce
some jobs and economic growth in the region through the opening
we made. The Congress found it was inefficient. Two years ago
it went to improve the terms of the CBI agreement to strengthen
the partnership in the textile and apparel area. And I want to
focus on that for one moment if I can, because I think that it
shows very clearly what is at stake in this agreement with
respect to your question, Mr. Chairman.
On the basis of the partnership we formed, this region
would buy our fabric and our input, and they would produce the
garments and we would allow them duty-free into the United
States on the basis of their U.S. content. This region has
built a broad apparel industry. That industry now employs half
a million people. The people employed in this industry in
Central America are basically single head of households.
Basically, they are unwed mothers who are supporting children.
And a real, I think, risk in not passing the CAFTA from a
geopolitical standpoint is we need to reinforce that
partnership that we have had that has built this industry and
created those jobs now that, under the WTO, the multi-fiber
agreement is no longer in place, and only tariffs, no longer
quotas, will affect what the access is into the U.S. market. We
have already seen a strong push in the early months of this
year from China and other Asian countries, in some instances
sending us as many goods in the first couple months as they did
in all of last year.
If, in fact, we don't reinforce those jobs in Central
America, this industry, these countries will a) not be in a
position to be buying our inputs as they have been, so we will
lose that business, but they will also--they don't have another
means to pay for import goods into their market. They are going
to have to cut back on what they are buying, buying from us
generally. If they can sell us $10 billion less, they can buy
$10 billion less. But we are going to do that in a context
which you can see here by way of the possibility for a
dangerous spiraling-down of economic opportunities in the
region. And I think that when you are in a situation as we are
in these countries where the rule of law and democracies are
just being put in place, having the potential of throwing a
large number of people out of work without other economic
opportunities is definitely problematic for the United States.
Mr. Stearns. My time is expiring. The ranking member, Ms.
Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman. First, I would
like to ask unanimous consent to put into the record two
documents from the United States Conference of Catholic Bishops
where they urge us to evaluate CAFTA's provisions in light of
the moral criteria laid out in their joint statement, and two
documents from a broad environmental coalition of a number of
organizations. And so I would like----
Mr. Stearns. By unanimous consent----
Ms. Schakowsky. [continuing] this in the record.
Mr. Stearns. [continuing] so ordered.
Ms. Schakowsky. Thank you. Ms. Vargo, back in June of 2003
when CAFTA negotiating processes began, the USTR admitted the
serious problems with Central American labor laws and pledged
to take action to address those problems before duplicating the
labor rules of the Chile and Singapore FTA's in CAFTA. Deputy
USTR Peter Allgeier testified before Congress that whether the
labor provisions of the Chile and Singapore agreements would be
sufficient for Central America, this is from him, ``depends in
part on what changes in their laws they make during the
negotiating process.'' He stated that ``Frankly, the different
circumstances that exist in those countries and among those
countries compared to, for example, Chile and Singapore'' may
require a different approach. And he pledged that USTR would
``need to get those labor standards and the enforcement of
labor rights up to a certain level before we would find
acceptable a commitment to enforce those laws.''
Now, you know, you talked about capacity building, and
those efforts may or may not come to fruition, and none of what
you have talked about is actually in the agreement itself. A
year and a half later most of the Central American countries
really have done nothing to bring their labor laws--I am
talking what is on the books right now--closer to international
standards during the CAFTA negotiations. The only country that
partially reformed its laws in response to ILO criticism is
Nicaragua, but serious deficiencies remain in the laws even
there.
So nonetheless, despite what the USTR representative said,
the CAFTA labor chapter is an exact replica of the Chile and
Singapore model. It requires only the enforcement of domestic
labor laws, no matter how inadequate those laws are. So this
model was no acceptable to the USTR for Central America in
2003. Why should Congress find it acceptable today?
Ms. Regina Vargo. Well, thank you very much for that
question, Congresswoman, and actually, I welcome the
opportunity to maybe lend some insight to that remark. I think
what Ambassador Allgeier was signaling to the Congress in his
testimony was that we were aware of fairly widespread concerns
with the labor situation in these countries. And in fact I
would say that perhaps our own initial preconception was that
there would be difficulties with their law reflecting the
international ILO core labor standards.
Recognizing that this was going to be a major area of
contention, the labor ministers in the region, subsequent to
Ambassador Allgeier's remarks, actually invited the ILO to come
in and do a study of their labor laws. And we believe that that
study confirmed that the laws on the books--the way they are
captured in their constitution and the way their ratification
of the ILO core labor conventions and some of the labor laws
are set up--they do give effect to these international ILO core
labor standards and do provide a meaningful basis for a
requirement in the agreement to effectively enforce their own
labor laws.
Ms. Schakowsky. Even if what you said were the case, and we
will hear some other testimony, those nations could change
labor laws, and because they only have to enforce what their
laws are, couldn't they weaken them at any point?
Ms. Regina Vargo. We don't see this as having much
likelihood. All of their direction has been in improving their
labor laws, and over the course of the last decade, most of
these countries--Honduras is the exception and they are doing
it right now--have undertaken labor law reform, utilizing
technical assistance from the ILO.
You also have to recognize that the way labor is presented
in their constitutions themselves present an important basis
for how they give effect to these international core labor
standards.
Ms. Schakowsky. So you just think it is unlikely? My time
has actually expired. Thank you.
Mr. Stearns. Thank you. Thank the gentlelady. Mr. Rogers.
Mr. Rogers. Thank you, Mr. Chairman, and thank you, Ms.
Vargo, for attending today. It is important. I am an ardent
free trader and am encouraged to see some of the agreements
that you reached in CAFTA that I thought were I think a step in
the right direction.
I have one concern, and I think what you are saying here
are there are those here who aren't going to be for trade no
matter what, and there are those who support trade no matter
what. And I think there is a kind of a coming together in the
middle of those of us who are concerned about the fact that the
enforcement of the USTR has, I can't say, been a failure, but
it has been abysmal at best. And coming from a State like
Michigan, we build cars, or we are still trying to build cars
in Michigan. We have found that it is incredibly frustrating to
try to work through the idea of, again, people who supported
these trade agreements worried about the enforcement side of
it. So help me walk through--I mean, intellectual property from
brake pads to golf clubs to pharmaceuticals to DVDs, horrible
problem around the world. And I think, quite frankly, you all
have done a horrible job of stepping up to the plate. Currency
manipulation, killing us. Horrible job stepping up to the
plate.
And so our argument is, hey look, I want to be a free
trader; I want to be for trade agreements. But without an
enforcement component in today's global competitive
environment, we are in trouble. And you need a referee on the
field. If it is going to be a fair game, there has got to be
somebody there to throw the yellow flag when somebody is
cheating. And there are nations around the world, some of which
are engaged in these trade agreements, who are cheating.
Even under NAFTA, if you look at the non-tariff trade
barriers under NAFTA, horrible job removing those trade
barriers between Mexico on agricultural products. I could give
you a list a mile long. A horrible job. And our argument is
look, NAFTA, I think, at the end of the day is a good thing and
it is a powerful positive for the United States and Mexico. But
if you don't remove those non-tariff trade barriers through
aggressive pursuit, we are going to be in trouble.
And we are having a hard time selling CAFTA to people
because of that track record. And I believe that, you know, the
best diplomat, the best program to cure poverty is really
commerce. And so we need to promote commerce, but we can't do
it one without the other. So I hope you can help me understand,
how are you going to step up enforcement on CAFTA so we don't
run into these very same problems that we are running into on
other trade agreements?
Ms. Regina Vargo. Thank you very much, Congressman. And I
couldn't agree with you more about the importance of following
up on trade agreements on the enforcement angle. I do think
that we have been vigorous across a wide range of issues in
pursuing enforcement initiatives. Sometimes, at an informal
level, through consultations or a bilateral dialog, as opposed
to WTO dispute settlement, but we have, I think, a record of
achieving success in a number of large instances. But in
particular I would like to point to some of what I hear of your
concern in the intellectual property rights area, for example.
We have a major mission right now that is going to China and
through Asia on our ``Stop'' initiative to address
counterfeiting and piracy. The administration recently
indicated its increased concern with the currency situation.
But I would like to point out, because I hear it from this
committee, about the idea of a lack of enforcement leading to
the trade deficit, only about 10 percent of the U.S. trade
deficit is with countries with which we have free trade
agreements. The bulk of our trade deficit is with countries
that we don't--the vast bulk. So I think these trade agreements
represent an opportunity to put the right kind of rules into
place.
And you, sir, mentioned intellectual property. And
certainly, that is something in the CAFTA agreement where,
across a whole host of issues--whether that is protections for
digital products, as I mentioned earlier, strengthening
trademarks, strengthening border enforcement against
counterfeited goods, strengthening patent and copyright
protections--we are bringing these countries into our global
efforts to produce good IP protections such as the UPOV
Convention on plants and animals or the Internet Copyright
Treaties. This is a basis for bringing this region--because we
are talking about this agreement for the moment if I can--up to
those kind of world-class standards that we would like to see.
And we think we are doing it in a way that couples it with some
transitions in a few areas and some trade capacity building
assistance.
And frankly, I think there is a recognition on the part of
these countries that market access alone to the U.S. market
hasn't gotten them the growth they need. They recognize that
they need to put in place a better commercial environment.
Mr. Rogers. I appreciate that. What do you need from
Congress so that you can increase your enforcement and your
effectiveness in enforcement of these trade agreements? What
don't you have that you need us to give you to be a success?
Ms. Regina Vargo. Congressman, may I suggest that I get
back to you on that with a written answer----
Mr. Rogers. I would love it.
Ms. Regina Vargo. [continuing] because I think your
question isn't just relating to my region. I think that you are
addressing a broader question for the agency as a whole.
Mr. Rogers. True enough, but Mexico is a big problem,
especially in the non-tariff trade side, and I would be happy
to be supply you with all the information you need, at least
from our angle.
Ms. Regina Vargo. And we would be very happy to work with
you on the specific problems that you are particularly
looking----
Mr. Rogers. Right.
Ms. Regina Vargo. [continuing] at.
Mr. Rogers. Super.
Ms. Regina Vargo. I will point out that under NAFTA, Mexico
did become our second largest agricultural export market.
Mr. Rogers. Yes.
Ms. Regina Vargo. So we are selling, but you are right, we
have----
Mr. Rogers. Still problems, as you know. I am----
Ms. Regina Vargo. Problems, yes, I do.
Mr. Rogers. [continuing] sure you are aware.
Ms. Regina Vargo. Thank you.
Mr. Rogers. And we just need to be fair in all of those
arguments. Now, that being said, I think it is important that
we are going to knock down a whole bunch of trade barriers in
the Central American region, pretty important. Hopefully, you
can talk to me a little bit about the tariffs on automobiles.
Right now there is about a 10-percent tariff on U.S.
automobiles going to the region. How will this agreement affect
the selling of U.S. automobiles?
Ms. Regina Vargo. Those tariffs will be down throughout the
region within 10 years in Central America and within 5 years in
the Dominican Republic. One of the reasons for the slightly
longer phase-out on automobiles in the region is the role that
they play in their overall revenue structure. But our auto
companies were happy with that result. And obviously, that will
give our cars a leg up in this region.
Mr. Rogers. Sure. So there is a definitive date when those
tariffs will be gone and we will have free and open access to
selling cars in----
Ms. Regina Vargo. Absolutely.
Mr. Rogers. Incredibly important. Well, again, I look
forward to working with you--and my time is almost up--on those
issues. I hope you take this strong message back, that I think
that there are many who are eager to support CAFTA but need
some assurances on the trade enforcement, not only for this
agreement, but previous agreements so that we can get the
necessary folks in line to join in on what I think is going to
be a very important and positive trade agreement, not only for
Central America, but for the United States of America.
Ms. Regina Vargo. Thank you very much, Congressman.
Mr. Stearns. I thank my colleague. For unanimous consent,
request?
Ms. Schakowsky. Yes, thank you. I wanted to put into the
record a letter to Trade Representative Zoellick----
Mr. Stearns. By unanimous consent, so ordered.
Ms. Schakowsky. Let me just say that I think response to
what you had said about the ILO report, the letter just says
the characterization of the ILO report is inaccurate and
constitutes a misuse of the document. It says it better than I
could, and I would like it in the record. Thank you.
Mr. Stearns. Gentleman from Ohio is recognized, Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. Thank you very much,
Ms. Vargo. I just heard you say that countries where we have
trade agreements or most of our trade deficit is not that. I
would like to just show a chart that--this is one country we
have a trade agreement with called NAFTA. We had a trade
surplus the day NAFTA was signed of a few billion dollars. We
now have a trade deficit of almost $50 billion. So I am not
sure where you go with that.
A second point, when Ms. Schakowsky asserted that Central
American nations can weaken their labor and environmental laws
after CAFTA is implemented, your only answer to that was not to
prohibit that because you negotiated an agreement which
decidedly would not prohibit that, but you said that is
unlikely because of trends in Central America. I would just
answer that with one story. Before Guatemala and the Guatemalan
legislature approved the Central American Free Trade Agreement,
the U.S. trade rep went to their leaders and said unless you
change your generic drug law--on behalf, I assume, of the U.S.
drug industry--we are not going to include you in the Central
American Free Trade Agreement. That was pretty well documented.
So to say that American business won't go to any of these
Central American countries or Dominican Republic and lobby
their parliaments and legislatures to weaken labor laws is
something that just stretches the imagination a bit.
Now, my questions are a couple of places I would like to
briefly go. First of all, speaking--if a company making jeans
for export, a large U.S. company or whoever, fires 500 workers
in, say, Nicaragua because they tried to organize a union, the
only penalty under the Central American Free Trade Agreement is
fines limited to $15 million. The goods the company sells can
still enter the U.S. for sale duty-free. But if a street vendor
is selling a pirated Mickey Mouse DVD, the country in which
that occurs faces trade sanctions, the DVD is seized and
destroyed, and under CAFTA the offender is criminally liable
for mere possession of a pirated good. Does that mean we are
putting more emphasis on intellectual property than we are on
workers? Is that fair?
Ms. Regina Vargo. Well, let me move through a number of
issues that you raised in your----
Mr. Brown. Quickly, because we only get 5 minutes.
Ms. Regina Vargo. Sure. Okay.
Mr. Brown. And I have another question.
Ms. Regina Vargo. Well, first of all, with respect to your
earlier comment, I would point out Mr. Rogers' comment about
enforcing trade agreements, and that in fact the situation we
have with the DR with respect to data protection was one where,
having recently signed an agreement with that provision, the
government passed a law that overturned it. So I think I would
put that in the category of an enforcement action and would
think in fact that the Congress would be endorsing us for
effectively enforcing these free trade agreements.
With respect to the situation that you described for
workers illegally fired for forming a union, I think all of
these countries have taken steps to make sure that they are
applying the law in this area better than they have in the
past. The principal problem that I----
Mr. Brown. If I could interrupt, there is no guarantee in
this agreement that they will, because they can weaken their
laws after the Central American Free Trade Agreement is
ratified. And you have not told Ms. Schakowsky or me that the
answer is no to that so that they can--what you think they are
doing now and you say they are doing now doesn't mean that will
be their behavior in the future.
Ms. Regina Vargo. The ILO core labor principles that you
are referring to here are largely imbedded in their
constitutions and their ratifications of those treaties. I
think the problem that you are identifying, Mr. Brown, which is
an important one, is the application of that law and the
enforcement of that law. And when the ILO did its study on this
particular issue, what it found by and large were problems of,
for example----
Mr. Brown. Okay, I am going to interrupt. I only have----
Ms. Regina Vargo. Okay, you have 5 minutes----
Mr. Brown. No, no, I know I am not going----
Ms. Regina Vargo. Okay.
Mr. Brown. [continuing] to get an answer to this, so I am
going to move to something else. And I don't mean to be rude,
but I know what filibustering is in 5 minutes, so on this magic
word--CAFTA goes further than U.S. law in sheltering brand-name
drug makers from market competition. One example, CAFTA
provides for two forms of patent extension; the first one
permits extensions on delays in the examination process; the
second one permits extensions based on delays in the drug-
approval process. U.S. law places some limits on patent
extensions; CAFTA simply doesn't. In the U.S. the extension
only applies to the active ingredient of a new drug. It only
permits the extension of the term of a single patent, not
multiple patents. That is a bill that I worked on with Senator
McCain a couple of years ago. Is it right that a Central
American--to subject patients in developing countries and these
countries in Central America to greater delays in access to
generic drugs? Because under your negotiated CAFTA, patients in
Central America will be subjected to--will have less access to
generic drugs than they do in the United States because of the
way that was negotiated. Is that fair?
Ms. Regina Vargo. I don't think that would be fair, nor,
Congressman, do I think that is what the CAFTA does. The
important thing, and I will be fast here, is that the
provisions in the agreement don't require a change in law, and
they are consistent with U.S. law, which means the
flexibilities that we have in U.S. law with respect to the many
different instances you just mentioned would be available to
the CAFTA countries as well. There is nothing in the agreement
that prevents those countries from introducing those
flexibilities into their own law.
Mr. Brown. Except U.S. drug company lobbying, but that is a
whole other story. I would like to ask you if I could, Mr.
Chairman--I will wrap up--if I send you a series of questions
about patent law, if you would share your answers with us in
writing?
Ms. Regina Vargo. I would be happy to do that. Thank you
very much.
Mr. Stearns. I thank the gentleman. Mr. Otter.
Mr. Otter. Thank you, Mr. Chairman. I would like probably
to start off from the beginning with that question. If I send
you a series of questions relative to the implementation and
enforcement of agreements in the Americas--and I assume that
that means NAFTA as well as the potential CAFTA agreement--
would you submit answers to those questions?
Ms. Regina Vargo. I certainly would. I make that offer to
anyone on the committee who would care to do that, and I would
be happy, Congressman, to come and talk to you about what you
see as implementation problems as well.
Mr. Otter. Well, thank you for that. I am going to move
away a little bit from the specifics that some of my colleagues
have been--although I think they are terribly important, the
environmental agreements, the labor agreement. I am going to
move away a little bit of those and go to more of your final
statements relative to the geopolitical necessity and
importance of this. Do you believe that these countries right
now are free markets?
Ms. Regina Vargo. These countries are trying to be free
markets----
Mr. Otter. No, that isn't what I asked. What I asked was do
you believe that they are right now free markets?
Ms. Regina Vargo. Could I ask you to define what you mean
by that, sir?
Mr. Otter. Well, let us say, you know, obviously with all
the government regulation in the United States, we hardly have
a free market either. But do you believe that the countries'
economies in these countries, including the Dominican Republic
where I have spent some time, are free markets relative to the
same kind of free market that we struggle through in the United
States?
Ms. Regina Vargo. I believe these are market economies. I
think they have perhaps more barriers and more regulation than
the United States. And I think that there are many elements of
this agreement that will improve that situation dramatically.
Mr. Otter. Your conclusion is that with this agreement,
suddenly they are going to get this great aspiration for rule
of law; they are going to get this great aspiration for free
economy and all of a sudden develop into a strong democracy.
Wasn't that your conclusion?
Ms. Regina Vargo. I think, sir, that what we find is that
trade agreements are attractive to these countries because it
helps them introduce reforms that they sometimes have trouble
getting passed more----
Mr. Otter. Why is that?
Ms. Regina Vargo. Because of the market access component to
them. And it is important for these countries to consolidate
the access that they have here, to strengthen that textile and
apparel partnership we have----
Mr. Otter. So in other words----
Ms. Regina Vargo. [continuing] that is critical.
Mr. Otter. So in other words--I am also limited to 5
minutes, and most of that is gone. So in other words, if we
engage in commerce between the United States and the CAFTA
members, that we will then impart some freedom and impart some
free market and engage in economic building, and then, as a
result of that, we will get this additional benefit of building
a democracy and free people and rule of law. Is that what you
are saying?
Ms. Regina Vargo. No, sir, in the sense that I think you
described those as somehow sequentially with the reward coming
at the end of the process.
Mr. Otter. Oh, it happens----
Ms. Regina Vargo. This is a process of building and
reinforcing----
Mr. Otter. It happens during----
Ms. Regina Vargo. [continuing] that along the way.
Mr. Otter. It happens during? Then why don't we include
Cuba amongst this?
Ms. Regina Vargo. I don't think that there is the sense of
the Congress or the administration that there is a desire to do
a free trade agreement with Cuba. Actually----
Mr. Otter. But now there is not a----
Ms. Regina Vargo. --Congress asked us to do----
Mr. Otter. [continuing] consensus in Congress for CAFTA
either.
Ms. Regina Vargo. The Congress actually asked us to move to
a free trade agreement with the countries of the Caribbean
Basin in their last renewal, the Caribbean Basin Act, to put
that agreement, which is a one-way agreement, on a more
reciprocal basis.
Mr. Otter. Well, I would disagree with you because I think
we have got a history of trading with countries. And China is
certainly amongst those, isn't it? Aren't there other
dictatorial countries that we trade with, and the effort there
is to build democracy? I am not even going to ask you to
respond to that. One of the problems that I see--tell me
whether you agree with this or not--is that we are trying to
build free markets, yet we are trying to do it politically
instead of economically. And that is why the USTR, your
mission, comes under the State Department instead of the
Department of Commerce, is that right?
Ms. Regina Vargo. The USTR is actually part of the
Executive Office of the President. And I think we have a very
strong economic mission. I think that CAFTA is an instance
where we have an excellent dovetailing of both our economic and
our political--our geopolitical interests. And trade can help
us introduce more stabilization, more jobs into this region
which desperately needs them at a time that they are struggling
to move forward on rule of law.
The elements in the agreement as well, the transparency
elements, the anticorruption elements, are all there to help
formulate how the government interacts with its private sector,
with its business community--the sunshine elements on the
environmental side, the fact that dispute settlement under the
agreement calls for open hearings, amicus briefs, public
documents. These are all elements of things that we like about
the way we conduct our democracy and relate to our citizens
that we incorporate in our trade agreements. I think they are
commercial; I think they have an important social and political
element; I think they have a geopolitical element.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman. Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, Mr. Chairman. And first,
I need to apologize to Ms. Vargo for not keeping an
appointment. We were running behind. And obviously, even the
individual that I was meeting before your meeting, and, of
course, you couldn't wait that long, was actually a member of
the Congress from El Salvador, and I was just dying to ask you
all sorts of questions.
But I want to--in the limited amount of time I have, let us
see if you can give me some clarification. Can you explain to
me the policy of guaranteed system of preferences?
Ms. Regina Vargo. Yes----
Mr. Gonzalez. When it comes to collective bargaining with
the labor movement and so on.
Ms. Regina Vargo. GSP, the General System of Preferences,
is a unilateral preference program the U.S. Government has that
covers a scope of products that is less than that which is
covered under the CBI program, but it has a number of criteria
in it which relate to a country's eligibility for participation
in the program. One of those criteria relates to labor, and it
is whether or not the country is taking steps to provide for
internationally recognized core labor rights.
Mr. Gonzalez. Okay. And presently, it is applicable to
these particular countries that are the subject of the
Dominican Republic--CAFTA.
Ms. Regina Vargo. Right.
Mr. Gonzalez. All right. And so obviously you know where I
am going with this. My understanding is that all that will be
done away with, the applicability of what we refer to as GSP.
And I will have to read this because it is actually stated
quite succinctly. ``GSP allows for public workers' rights
petition based not just on the failure to enforce labor laws,
but on the adequacy of the laws themselves under international
standards.'' So my question is, what we presently have in CAFTA
is a departure from those standards, and it actually weakens
workers' rights and the rights for collective bargaining in
those respective countries?
Ms. Regina Vargo. I am very glad you raised this issue, Mr.
Gonzalez, because it has been a matter of some debate as people
have talked about this agreement. I think there is no doubt
that the labor protections in the CAFTA agreement are more
effective in accomplishing the objective. GSP, as I mentioned,
leaves full discretion to the administration on whether or not
to take any action. The criteria is whether they are taking
steps in that direction, not whether they have achieved it. It
is not an absolute. Are they moving toward that? And if you
look at how GSP has been applied to this region itself--and I
can use Guatemala as an example--we had GSP investigations and
ongoing cases from I think 1992 to 1997, across both Republican
and Democratic administrations, again in 2000 and 2003.
Guatemala retains full use of its GSP rights, in part because
actually withdrawing those benefits from a county and
potentially throwing workers in the region out of work is a
sledgehammer. People are reluctant to go that far. But in the
CAFTA, the requirement will be to enforce their own labor laws,
and we think the ILO has made it clear that those labor laws do
promote and give effect to those international core labor
rights.
If in fact the failure to enforce those laws is affecting
our trade, we can go in and we can, utilizing a dispute
settlement process, work with the country to agree on how to
correct the problem, or we can further implement fines to
correct the problem. And those fines are recurring fines. It is
an annual fine that keeps being paid until the problem is
solved.
If, in that process, we find that we are dealing with a
recalcitrant government, one that is not cooperating in a good
way with us, we have not ruled out the use of any tool to get
them to fix the problem, including the use of trade sanctions.
So we retain all----
Mr. Gonzalez. Available to you in the context of this
agreement?
Ms. Regina Vargo. Yes, so we retain all the tools that we
have ever had in GSP. And we have added, instead, the
possibility here of utilizing monetary fines because largely,
these issues, we think, are ones of resources and getting those
resources directed to fixing the problem.
Mr. Gonzalez. If these labor practices in these particular
countries come up short, what you are stating now is you have
the mechanism, the authority, and the power within the context
of this agreement to move forward, to correct, and to address
those shortcomings?
Ms. Regina Vargo. Yes, sir, we do.
Mr. Gonzalez. Thank you very much.
Mr. Stearns. Thank you, gentleman. Mr. Murphy.
Mr. Murphy of Pennsylvania. Thank you, Mr. Chairman. I want
to look at a couple of things in comparison of NAFTA and CAFTA
and use that as a basis to try to understand what is happening
now.
Now, in its analysis, USTR reported that agreement will
have minimal effect on U.S. employment, but a significant
portion of our current exports is to DR-CAFTA nations are
components of products that are assembled by DR-CAFTA workers
and re-imported back to the U.S. I am wondering to what extent
do you think this agreement is going to support additional
manufacturing work being conducted by workers in DR-CAFTA
nations? In other words, as this goes on, are we going to be
exporting more--the work will be done down there and perhaps be
brought back here for final assembly?
Ms. Regina Vargo. Let me say that that may be a trend that
is happening in the world, but I don't know of anything in
particular about this agreement that would necessarily promote
that outcome. That outcome, in the way you suggested it, might
be one one would look at when you say well, look at the new
access you are offering back to the U.S. market. But I am very
glad you returned to this point, Congressman, because CAFTA
rhymes with NAFTA, and maybe that is unfortunate for the
discussion that is going on here, but it starts from a
fundamentally very different premise. This Congress, in a
bipartisan way, has already given these countries virtually
duty-free access to the U.S. market. So what is new here is our
ability to access their market.
Mr. Murphy of Pennsylvania. So we did not have before with
Mexico--before NAFTA we did not have a situation where they
were importing things to our country duty-free?
Ms. Regina Vargo. Not in the same way that the Central
American countries already have.
Mr. Murphy of Pennsylvania. And I know that part of the
discussion here is one that says that if we don't do this,
someone else will. If we don't sell our goods to them, if they
are not an open market, there will be other countries that will
have that. And today we recognize it is a competitive market
that is increasingly competitive every day.
But that being the case I do look at things about NAFTA.
For example, some electronic components--electronics were made
in my district, and in Mexico there is zero duties on them. In
the United States, when they are made here, there is like $45
per each item on them. Now the head corporation says well,
then, let us move that manufacturing down to Mexico and pull
them out of the United States. So I look upon that as--even
though NAFTA has been around quite a while now, and one would
hope that some of the changes would have been made that allowed
us to be competitive. And so I look upon this--and I want to
make sure there is none of those glitches which continue to
essentially favor the other nation over ours when it comes to
manufacturing goods and the jobs that go with that.
Ms. Regina Vargo. Well, let me address your first point,
Congressman, those who say if we don't do it, others will. I
would note right now just two products that were mentioned.
There haven't been very many specific products mentioned here.
French fries was mentioned by the Congressman. Well, right now
Canada, through their free trade agreement, gets their French
fries in duty-free to Costa Rica. The Congresswoman from
California mentioned a concern with fruits and vegetables, and
yet Chile, right now, gets its fruits and vegetables into this
region duty-free. If we are looking at this imbalance of trade
that we have with this region, the fact that--and I am using
the fruits and vegetables example here--the fact that they
access our market duty-free and that we pay duties going into
that market, it is no new access to our market on fruits and
vegetables and is an example of a corrective mechanism in this
agreement, not one that is going to take a particular trend to
make it worse.
I think the same thing is true, sir, with respect to the
manufacturing sector. First of all, a lot of what we sell into
this region, we compete with other countries. Maybe it is not
even things they produce. We compete with Europe, we compete
with somebody else. They do buy our capital goods, our
tractors, our cars, our TVs, whatever, and we would have a
preferential access into this market under this agreement.
There are only--on the industrial side because you are
focused on manufacturing--there are only two products or areas
where these countries do not have duty-free access to the U.S.
market today. One is canned tuna and the other is some rubber
footwear items. They have duty-free access to our market now on
everything else, sir. Every other manufactured good enters the
United States duty-free today.
Mr. Murphy of Pennsylvania. And all those same goods, when
we sell to them, it does have a duty on it?
Ms. Regina Vargo. Yes, sir. I can't guarantee you every one
of them does, but I would say on areas of our major export
interest, things we tend to be very good at and look at as
export priorities, you will see that the tariffs are 5, 10, 15
percent.
Mr. Murphy of Pennsylvania. Well, I would like to see some
analysis of some of those items showing us those comparisons. I
mean, similarly, Pennsylvania farmers and agriculture is our
No. 1 industry in Pennsylvania. They are concerned about this
and they recognize the difference in the marketplace. But it
would be very helpful for us, and I hope you could submit some
additional information to the chairman on this, to look at how
that goes.
But I know we are trying to predict the future here, and
some of this is opening markets in nations that are emerging
and developing. And if that is the case, I mean, we need to
have some sense too what is happening both if we do this and
what happens if we don't. And that would be, I think, valuable
information for us to have. But part of that analysis I would
like to have you look at what has happened with NAFTA in terms
of what I hope were unintended consequences. But we still have
some real unfair duties when it comes to goods being made there
versus here. And that is having a negative impact upon
particularly in some of the electronic industries in my
district. And I hope that is something you can give us some
insight on as well.
Ms. Regina Vargo. Thank you, Congressman. And I would like
to take the opportunity later to perhaps get an elaboration on
that point from you because I am not aware of duties that
Mexico has in the electronics area. So I would like to follow
up to give you the best possible answer.
Mr. Murphy of Pennsylvania. Thank you very much. That is
all I have, Mr. Chairman.
Mr. Stearns. I thank the gentleman. Mr. Strickland.
Mr. Strickland. Thank you, Mr. Chairman. Ms. Vargo, I would
like to focus our attention on NAFTA's Chapter 11 foreign
investor protections because these have created considerable
bipartisan controversy. These allow foreign corporations to sue
governments in closed trade tribunals over public health and
safety laws that foreign companies claim cost them lost
profits, and they demand our tax dollars in compensation. This
sounds like a direct assault on our U.S. sovereignty, so much
so that there are some states--I believe Montana, Indiana, and
Utah have passed legislation raising these concerns. According
to the CAFTA text as I understand it, in these tribunals
international law, not U.S. law, prevails. Is that your
understanding?
Ms. Regina Vargo. Thank you, Congressman, for raising this
topic, which I think in the CAFTA agreement we have made very
many improvements.
Mr. Strickland. But----
Ms. Regina Vargo. No, it is----
Mr. Strickland. [continuing] if you could just--I am sorry
for----
Ms. Regina Vargo. No----
Mr. Strickland. [continuing] interrupting----
Ms. Regina Vargo. [continuing] we do not provide greater
protection for foreign investors than for U.S. investors.
Mr. Strickland. But in these tribunals does international
law prevail, not U.S. law?
Ms. Regina Vargo. No, sir. The guidance that they follow is
the laws of the country that the allegation is being brought
against. But more specifically, let me point out to you this
issue was raised; we were asked to clarify the standard for
expropriation, which was done. The agreement specifically says
that in the matter of, for example, environmental regulation by
a State----
Mr. Strickland. Whatever----
Ms. Regina Vargo. [continuing] that----
Mr. Strickland. [continuing] regulation.
Ms. Regina Vargo. Whatever kind of regulation.
Mr. Strickland. Yes.
Ms. Regina Vargo. That if it is supplied in a
nondiscriminatory manner, that it is highly unlikely to
constitute an indirect expropriation, and in defining what that
highly unlikely circumstance might be, the guidance the court
uses is the Supreme Court ruling in the Penn Central case,
which is the seminal U.S. law on what constitutes an indirect
taking. And that, sir, is a new, novel element that is in the
CAFTA----
Mr. Strickland. Okay.
Ms. Regina Vargo. [continuing] specifically to address the
problem that you raise.
Mr. Strickland. Okay, but since NAFTA, $35 million has been
ordered to be paid to foreign corporations by these secret
tribunals. My understanding is--and by the way, highly unlikely
is not a sufficient standard for me, and I doubt if it is a
sufficient standard for my colleagues. We are talking about an
international agreement, and I think the criteria should be
tighter than highly unlikely.
It is my understanding that in these international
tribunals, they can order, you know, the U.S. tax dollars to be
paid to a foreign corporation. Now this is a question. It is
also my understanding that domestic companies would not have
the right to use the CAFTA investment protection rights or the
CAFTA tribunals. Is that right or am I mistaken?
Ms. Regina Vargo. Our domestic companies could use these
tribunals for investment claims that they were making against
the other governments to the agreement, not against the U.S.
Government.
But, sir, may I for one moment--``highly unlikely'' I think
was my terminology. I think the exact wording is except in
unusual circumstances. But the point there was that the law
that is followed is U.S. law in that case. The other
clarification I would like to make for you is that we made a
change from the NAFTA and the CAFTA in response, in particular,
to the concern that you have raised. And these international
tribunals now are open to the public. The documents become
public documents except for business confidential, the practice
that we have here in the United States. And we now take amicus
briefs from third parties who feel that they have an interest
in the case. These----
Mr. Strickland. So are you----
Ms. Regina Vargo. [continuing] were all criticisms leveled
in the past that we have sought to address in this agreement.
Mr. Strickland. So are you telling me that under CAFTA
domestic companies would have equal access to the CAFTA
investment protection rights and the CAFTA tribunals, that they
would not have to use U.S. law or U.S. courts? And are you
further telling me that we are not giving foreign corporations
greater rights than that that would be available to United
States corporations?
Ms. Regina Vargo. Yes, sir. For domestic disputes with the
U.S. Government, our companies would utilize domestic courts.
They would utilize the system with respect to disputes they had
with the foreign governments. And we do not provide greater
rights to foreign companies than we do to U.S. law and made a
number of important clarifications in this agreement to ensure
that that was the case. That was part of our TPA instructions.
Mr. Strickland. So just to make sure I understand, domestic
corporations would have the very same access to these tribunals
and to the protections that are available to the CAFTA
countries, as would our domestic companies?
Ms. Regina Vargo. Our companies would be able to take the
foreign governments of Central America and the Dominican
Republic to binding, international arbitration for investment
disputes that they had with them. I ask you to restate your
question, sir.
Mr. Strickland. Yes----
Mr. Stearns. The gentleman's time has expired, and we have
two other panels----
Mr. Strickland. Okay, I----
Mr. Stearns. [continuing] and I think your questions are
certainly good and legitimate, and it might be possible that
you could put them in writing to her and she could reply.
Mr. Strickland. I would be happy to do that, Mr. Chairman.
And thank you, Ms. Vargo.
Mr. Stearns. And I thank the gentleman. The gentlelady from
Tennessee.
Ms. Blackburn. Thank you, Mr. Chairman, and I thank our
guest this morning for her time. I also want to thank the
chairman for his comments and concerns about NAFTA and the
implementation of such, because that is a concern.
My district in Tennessee is one of those wonderful
districts that has had the opportunity to increase both the
agricultural product and the manufactured goods that they
export. We have been very pleased to see our exports rise, our
product for export rise about 20 percent over the past decade.
But with that said, when we look at the agricultural
component of CAFTA, we are concerned. Cotton is important to
us, soybeans are important to us, vegetables, row crops,
processed foods. All of that plays into West Tennessee and our
economy there. So while we are pro-export and are very
interested in CAFTA, we do have some concerns. And much of that
does center around cotton. And I was pleased to hear your
comments that you just made in your opening statement and in
one of your responses about the agreement should be there to
benefit the participating countries. And I liked hearing that
because I agree with that statement and do hope that CAFTA will
benefit our State. And we are interested in the yarn-forward
rule and feel that that is going to be very important for our
Tennessee cotton growers.
And I would like to hear from you if you feel certain that
this agreement is going to continue the yarn-forward rule,
because my farmers are quite concerned about having cotton that
is grown and produced cheaply in China and having that routed
through Central America and then into the American market. So
if you will please address the yarn-forward rule.
Ms. Regina Vargo. Thank you very much for your question
because what we are doing in the textile and apparel area is
just so important. And the National Cotton Council supports
this agreement. Not yet? I am going to take that back. I am
anticipating that they will support this agreement in part
because two products that you mentioned, ma'am, cottons and
soybeans, have duty-free access to the region on day one. The
same is true for many of the fruits and vegetables.
But going to the rule of origin for a moment, it is a rule
of origin that requires yarn-forward--that is the basis--but in
terms of our exports, $4 billion-worth of exports that the
United States sells to these countries today. There is a
small--without getting technical--exception for Nicaragua,
which I have heard some concern expressed over that this will
become a backdoor. I would note that this is a small quantity;
it is temporary in nature; it reflects trade that already
doesn't meet the rule. We wanted to give Nicaragua a little bit
of time so that those plants didn't move out of that country to
another Central American country. That is why we made the rule
transitional. And we have very strong trans-shipment provisions
and custom enforcement provisions in this agreement so that we
feel confident that this is a partnership that is going to
work. It is going to work for our yarn and fiber and for our
cotton producers.
Ms. Blackburn. Okay, thank you. Let us shift a little bit
in this conversation. I want to talk about intellectual
property because we have the largest population of songwriters
in the country live in my Congressional district. And we are
tremendously concerned about intellectual property and the
provisions that are there. And, you know, when we look at
this--when my folks that are in Nashville and Franklin, and
Middle, Tennessee, and some of them down in Memphis start
looking at these trade agreements, immediately China and India
and the production of the counterfeit DVDs and CDs comes to
mind. And Mr. Rogers asked you earlier what you needed from us
when you look at helping capacity bill and helping get laws on
the books in these other countries. And I hope you will take
that as not being an empty question or rhetoric. When you hear
us talk about intellectual property, this is a tremendously
important economic development issue in my State. The theft of
intellectual property and the piracy, the modern-day pirates
that are out there stealing this content from our producers,
they are shameful. And I want to know what you are going to do,
not what you need.
But you have addressed in your opening statement--you have
a couple of paragraphs in here addressing intellectual property
protection. But what are you going to do? How are you working
with these countries so that they have enforceable legislation
on the books? That they have got laws we can negotiate to so
that we can begin to clamp down on this piracy. That is the No.
1 question I get from the folks in the creative industries, the
creative class that lives in my district. Well, that is great
if they say they are going to work on it, but what are they
going to do? Actually give us some quantifiable goals and some
steps and some items that you are going to have on that paper,
and then what you are going to do to enforce those if you will
answer that one for me, please, ma'am.
Ms. Regina Vargo. I would be happy to do that. We need
stories like this and it helps us make our case. And we would
be happy to send someone to meet with you or to put some of
this in writing as well. Let me just say that I think we have
extremely strong protections here for the entertainment
industry, and one of the things that we look at before we
actually let our agreements go into effect is whether or not
the countries have taken the steps in their own laws to put
these protections in place. So we will be doing that. I was
just alerted----
Ms. Blackburn. Ma'am, if I may interrupt you.
Ms. Regina Vargo. Yes.
Ms. Blackburn. I see a lot of papers flying in front of
you, and so I know that they are providing you with some
information on that. I would ask that you do provide that to me
in writing. This is so crucial. We talk about wanting an
economic renaissance in this nation, but when you talk about
the creative community that lives in my district, whether they
are entertainers or TV producers or film producers or they are
auto designers or they are working in the biotech industry,
these are folks whose intellectual property is their stock in
trade. And I want to be certain that we find ways to protect
this. It is vital to us. I think it is vital to our nation, not
just to the seventh district of Tennessee. So as all of this
paper is flying in front of you, I am going to request that in
the interest of time that you just submit that to us in writing
so that we will have that to use with our constituents. So
thank you for your time, and, Mr. Chairman----
Mr. Stearns. And I thank the----
Ms. Blackburn. [continuing] I thank you.
Mr. Stearns. [continuing] gentlelady. The gentlelady from
North Carolina, Ms. Myrick.
Ms. Myrick. Thank you, Mr. Chairman. And thank you for
being here today. I come from a district that both has enjoyed
a lot of benefits from trade and has had a lot of problems
because of trade. I have always been a free trader myself in
the concept, but I represent a very heavy textile area, and for
years we have been going through a lot of transition as you
know. And so I know there is some good things in this
particular agreement, particular with our yarn-forwarding
provision, et cetera, the give-and-take back and forth. The
tee-shirt cap is going to be removed, which is a big help also.
And there are some other things. But I have to go back as well
to the enforcement issues, because that is where we have the
greatest difficulty in our area and in making people understand
any benefit from free trade because they are enforcing prior
agreements. And, of course, in our case China is a huge part of
that.
But on the trans-shipment side, I noticed you said that
that was one thing you were going to be careful of in these
agreements. You know, we have had a very frustrating experience
with customs. Not the people who are actually in customs are
running that part of the agency. They are just as frustrated as
us. Customs was moved into homeland security. And 2 years ago
Congress authorized $9.5 million to hire 72 new agents strictly
for customs trans-shipments because that was the biggest
concern that we had. They have completely ignored that, shifted
the money to something else. We are having lots of fun getting
answers out of them. And my point in telling you that is it is
not under your jurisdiction as USTR, and I know that. And I
know you work closely with Commerce on all the issues, and we
appreciate that. The safeguards for China, et cetera, are very
important to us.
But we have a hard time at home explaining why something
simple like enforcement, in this particular case, isn't being
done. So when you are trying to sell a trade agreement in North
Carolina and in my district, yes, in Charlotte where we are the
second largest financial center, et cetera, wonderful; no
problems. But then when you go to our areas where we are heavy
manufacturing and textiles--and Mike Rogers and I are a lot
alike in the way we think about all this. It really is a
challenge for us. And so I would just encourage you that
anything relative to this particular agreement that you know
can be done that is going to give strong enforcement provisions
would be helpful.
You know, we are very frustrated because--and China not
playing by the rules of WTO. I know you are working on the
currency issue. But it isn't happening fast enough, and that
message has to get to them to.
So, I mean, all of this, even though they are separate
issues, they aren't separate issues for my district. One thing
is into the other. And any kind of help you can give relative
to answers would be much appreciated. It is really more a
statement than a question, Ms. Vargo.
Ms. Regina Vargo. Well, I thank you very much,
Congresswoman, for your interest. And you are right, obviously;
the budget of homeland security isn't under us. But the terms
in the agreement here will allow us to be much more effective
monitoring in terms of being able to get--when we get those
customs people in, take a look at that, they will be able to
actually go in-country. We can get our jump teams much more on
the ground and much more hands-on to make sure that we are not
creating a leaky sieve into the United States through these
countries. They are going to be good partners. And I take your
other, larger enforcement question on board as well. And we
look forward to working with you on that and any particular
problems that you might wish to identify for North Carolina.
Ms. Myrick. I appreciate it. Thank you.
Mr. Stearns. Well, and we thank you. We have completed and
we appreciate your patience here. And we think you are to be
commended for participating. So now I think we will then move
to panel No. 2. So, Ms. Vargo, thank you very much.
Ms. Regina Vargo. Thank you, Mr. Chairman. If I could just
make one comment back to Ms. Schakowsky for a moment----
Ms. Schakowsky. Yes.
Ms. Regina Vargo. [continuing] that we did respond to the
letter that you have introduced into the record and we would
like to make--I would like to make sure that you have a copy of
that response and perhaps that would be appropriate----
Mr. Stearns. Sure.
Ms. Regina Vargo. [continuing] in the record as well, Mr.
Chairman.
Mr. Stearns. By unanimous consent, so ordered, then.
Ms. Regina Vargo. Thank you.
Mr. Stearns. Okay. That would be great. All right. We have
Kevin Kearns, President of U.S. Business and Industry Council;
and Ms. Thea M. Lee, Chief International Economist, the AFL-
CIO; Mr. Calman J. Cohen, President, Emergency Committee for
American Trade; and Mr. Frank Vargo, Vice President,
International Economic Affairs, National Association of
Manufacturers. We appreciate you folks waiting through our
first panel. And so we look forward to your opening statements.
And I would remind each of you that it has been established
that we give you each 5 minutes. We allow you to run over a
little bit, but if you could hopefully keep it in that, we will
keep the committee moving. And then we have a third panel of
four individuals that are waiting patiently here too. So, Mr.
Kearns, I think I will start on my left and start with you with
your opening statement, if you would be so kind. Just turn the
microphone on.
STATEMENTS OF KEVIN L. KEARNS, PRESIDENT OF U.S. BUSINESS AND
INDUSTRY COUNCIL; THEA M. LEE, CHIEF INTERNATIONAL ECONOMIST,
AFL-CIO; CALMAN J. COHEN, PRESIDENT, EMERGENCY COMMITTEE FOR
AMERICAN TRADE; AND FRANK VARGO, VICE PRESIDENT, INTERNATIONAL
ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Kearns. Thank you very much, Mr. Chairman. Also thank
you to the ranking member, Ms. Schakowsky, for the opportunity
to appear here today.
I am Kevin Kearns, President of the U.S. Business and
Industry Council. We are a national business advocacy
organization, we have been around since 1933, and we take a
national interest approach to public policy questions. We
represent businesses generally family owned and closely held
businesses across the economic spectrum.
We are opposed to CAFTA. We were opposed to NAFTA. We think
that CAFTA will actually have four or five negative results. It
is shipment of more factories overseas, loss of U.S. jobs,
lower wages or suppression effect on wages for remaining
workers in the United States as they are pitted against Central
American workers, more market access for China to the U.S.
market through the loopholes in the various provisions of the
agreement.
If I could step back for 1 minute. I know we are focusing
on CAFTA, but let us look at the larger picture. And I think
Congressman Brown tried to get at this somewhat with his chart.
In 1993, the last full year before NAFTA came in and then the
Uruguay Round, WTO, PNTR for China, CBI, various bilateral
trade agreements, the U.S. had roughly a $68-billion trade
deficit in goods and services. Today it is--or at the end of
last year it was $618 billion, you know, nine or ten times what
it was after 12 years of these free-trade agreements. Our total
exports of goods and services rose, but our total imports rose
much faster. Exports doubled, imports tripled creating this
massive trade deficit that we face today. U.S. service surplus
has continued to fall, was $48.5 billion last year. And it is a
significant decrease from where we were in 1993.
If you look at the trade deficit with China, I don't think
I have to call attention to that, $124 billion the previous
year, up $262 billion last year, growing tremendously. Even
with Europe with the decrease of the dollar versus the Euro,
the trade deficit climbed by $8.85 billion in 2004, a 12-
percent increase. And our trade deficit with Canada increased;
our trade deficit with Mexico increased. I think they are up--
on the members of the committee mentioned 1,200-percent growth
in NAFTA trade deficits over these last several years.
And the fact that we are losing ground, even with countries
in Europe where our dollar has depreciated, theoretically, we
should be gaining ground, but we are losing ground. And that I
think is the strongest signal that there are all these
structural impediments that these trade agreements have not
gotten to.
I would submit, members of the committee, that if this were
a scientific experiment over the last 12 years, we would stop
it, and we would go back and examine our premises. If it were a
poker game, we would fold our hand and walk away from the
table, pick up the money we had left, and figure out a
different strategy. And if it were a clinical trial, we would
be morally obligated to stop it before there were anymore dead
bodies on the floor.
We face a dollar crisis. We saw in the last few weeks
remarks by the Japanese prime minister and South Korean
Ministry of Finance official that sent the currency markets
into a tizzy. If the Asian Central Banks stop buying dollars,
the game is over. We have had Federal Reserve Chairman
Greenspan say our trade deficit is unsustainable on numerous
occasions. We have had former chairman Paul Volcker been
talking about this for about 10 years. Most recently I saw him
on Charlie Rose television program. He says, ``It can't go on
indefinitely.'' And we seem to think that somehow we can
continue to run these trade deficits and just muddle through.
And CAFTA is another one of these trade deficits. The gains
projected by CAFTA proponents are very modest, $1 billion
perhaps in manufactured goods, $1 billion in agriculture. I
mean, essentially, we are talking about peanuts. These are very
poor countries. They are under IMF Wastery agreements. Their
population majority makes under $2 a day. They are not going to
be buying U.S. goods.
And the claim is made that well, this is what we need to
compete against China. We need CAFTA to compete against China.
Ms. Vargo misspoke. She said there were half a billion
people in the textile industry. It is half a million in Central
America. And she mentioned the fact that they are largely
women. Well, I am concerned about the U.S. textile and apparel
industry where the majority of the workers are women and
minorities. I think that is what the U.S. trade representative
should be focusing on, American workers. I think that is their
job.
Do we want to support democracy in Central America? We do.
But do ranchers and farmers and textile workers, do they have
to give up their jobs to do that? I don't think that is a fair
equation.
The way to address the China problem is to address the
China problem, not to do it through CAFTA, not to give up more
U.S. jobs and factories to go to Central America looking for
sort of a backdoor and have the Chinese continue to have a 40
percent undervalued currency, 15 percent export subsidy, free
land and free buildings, no or low-cost loans from State banks,
you know, any number of other government forms of subsidy and
assistance.
So if we can't ``defeat'' or compete with China after
NAFTA, which, of course, NAFTA was designed to do, we are
certainly not going to do it by aligning with six dirt-poor
nations under IMF Wastery agreements. You need a different
strategy, Mr. Chairman. The papers and the websites of the
proponents of CAFTA, you look at them and you can tell what the
real game is.
Mr. Stearns. Mr. Kearns, I am just going to have you sum
up. We are----
Mr. Kearns. Yes, sir----
Mr. Stearns. [continuing] going to try to keep things
moving.
Mr. Kearns. Okay. The real game is to get into a whole
series of other trade agreements, the Andean free trade to the
Americas, the Doha Round, to jumpstart all of these through
CAFTA. All these agreements, CAFTA is a signal. It is a green
light. We are going to continue down this policy. We need to
stop, we need to stop CAFTA, we need to stop digging this hole
deeper. First rule of holes, when you are in one, stop digging.
Figure out a new strategy and get out. That is what this
country needs. Thank you, Mr. Chairman.
[The prepared statement of Kevin L. Kearns follows:]
Prepared Statement of Kevin L. Kearns, President, U.S. Business &
Industry Council
Mr. Chairman and Members of the Committee: I would first like to
thank the Committee for allowing me the opportunity to express the many
concerns of U.S. domestic manufacturers and other small and medium-
sized businesses regarding CAFTA.My name is Kevin L. Kearns, President
of the United States Business and Industry Council.We are anational
business advocacy organization, established in 1933, that takes a
national interest approach to public policy issues.USBIC is not a trade
association, representing a single industry. Our members come from many
different sectors of the economy.
We represent companies that have made an outsized contribution to
America's national security and prosperity. We are a critical part of
America's domestic manufacturing base. Our enterprises support the
broad middle class, one of America's singular economic and political
achievements. Today our companies in particular and the nation's middle
class in general are under constant attack from predatory foreign trade
practices.
Our companies still make most of their products in the United
States, ensuring that our revenues flow to American working families in
the form of wages, to American productive facilities and R&D in the
form of reinvestment in our businesses, and to our local, state and
national communities in the form of the taxes needed to fund vital
public services and our country's security.
We are economically and socially critical to our communities. All
of us are strong believers in free enterprise. We are job creators. We
are productivity drivers. We are technology pioneers. But now, our very
existence and ability to create these benefits is being threatened by
decades of trade policies that ignore reality and in fact seem designed
to close us down.
Although we are promised that CAFTA will open big new foreign
markets for U.S.-made goods, the opposite is clearly true. The results
of the outsourcing deals that have dominated U.S. trade policy over the
last twelve years are in: gargantuan trade deficits, shuttered
factories, and formerly middle-class Americans sliding down the job and
wage scales. CAFTA is simply the latest in this series of outsourcing
deals that are gutting our domestic manufacturing base.
The six other CAFTA signatories are manifestly too small, too poor,
and often too indebted to become significant consumer markets for U.S.
exports. Their only attraction is to multinational corporations, which
see them as low-cost bases for supplying the U.S. market, and as levers
to force companies and industries like ours to compete on price rather
than on quality and innovation. This is a no-win proposition for
domestic manufacturing and for the nation as a whole.
As a result, CAFTA's passage will surely increase net U.S. imports,
boost the already dangerously high trade deficit, further weaken the
dollar, force the continued fire sale of American assets, and reduce
domestic manufacturing output, employment, and technological
innovation.
New trade agreements could strengthen domestic manufacturing, but
only as part of a thorough overhaul of U.S. trade policy aimed at
promoting domestic production and living standards. Absent new
approaches for dealing with challenges such as China's many predatory
trade practices, the widespread foreign subsidization of manufacturing,
and a deeply flawed set of world trade rules, CAFTA's passage will
simply further open America's market to imports without producing
comparable export opportunities.
Passage of CAFTA will also stand as a major obstacle to effecting
urgently needed alternatives to the failed free trade model that is
destroying domestic American manufacturing and the wider economy. CAFTA
will become a political bridge to even more destructive trade deals
that are lined up behind it and that the multinationals and retailers
are pushing to complete.
Here are the chief problems with CAFTA:
There is not a Central American Market for U.S. Exports--Simply
put, CAFTA is an outsourcing agreement. The trade agreement involves
the countries of Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua and the Dominican Republic. These six small countries simply
cannot serve as net consumers of U.S. exports, and so CAFTA will only
lead to a worsening of the current U.S. trade deficit--as have all of
the trade agreements of the last 12 years.
As previously reported by USBIC, these six countries have a
collective gross domestic product (GDP) of $85 billion. By comparison,
New Haven, Connecticut has a GDP of $80 billion. Tampa-St. Petersburg
has an $87 billion GDP. The pro-CAFTA lobby acknowledges that
``millions live on less than $2 a day.''
Moreover, Nicaragua, Honduras, Costa Rica, and the Dominican
Republic are already under International Monetary Fund (IMF) austerity
agreements as a result of their large foreign debt and deep poverty.
For example, the Dominican Republic has $7.6 billion in foreign debt,
2002 inflation topped 43 percent, and the poverty rate is 67 percent.
As a result, CAFTA can only lock the United States into a trade
relationship with countries that can only be net exporters to America,
and that will increase the already dangerously large U.S. trade
deficit.
CAFTA is an Outsourcing Agreement--Pro-CAFTA lobbyists like to
portray the Central American countries as a huge market for U.S.
exports, even surpassing Brazil and Australia. Instead, CAFTA is
largely a market for U.S. ``turnaround'' exports--products shipped
south for assembly and then final sale in the U.S.--particularly
textiles and semiconductors. 35 percent of the modest $15 billion in
exports to CAFTA countries are ``turnaround exports,'' which increased
by $1.36 billion from 1997-2004.
``Turnaround'' exports simply represent outsourcing that supplants
U.S. production and employment for cheap overseas labor, and drives
down U.S. living standards. Due to Central American turnaround trade,
the U.S. trade deficit with the CAFTA-6 rose nearly 60 percent from
1997-2004, and was $2.4 billion in 2004.
CAFTA Is Poorly Negotiated and Allows Chinese Textile
Transshipments--Already, 75 percent of Central American exports to the
United States are duty-free, including 99.9 percent of food and
agricultural products. As of 2001, 70 percent of U.S. industrial
exports had zero-duty access to the Central American market. CAFTA will
only increase that percentage to 80 percent.
CAFTA claims to benefit U.S.-based fabric manufacturers by
requiring the use of American-made fabrics in foreign garment
production. This is called ``yarn forward.'' However, CAFTA includes a
number of loopholes to undermine this. One, the Yarn Forward provisions
of the agreement cover only the ``essential fabric'' in a garment, and
leave out much non-visible material.Two, due to ``single
transformation'' exceptions, components of such products as bras and
sleepwear, for example, can be imported duty-free into the United
States in unlimited quantities even when made entirely outside the
CAFTA region, in China for example.
Another problem is the ``cumulation'' provisions of CAFTA, which
allow duty-free entry into the United States of any apparel or related
products made entirely of fabric components from any country party to a
free trade agreement with any CAFTA signatory. Thus, non-American
denim, wool, cotton, and man-made fibers produced in Mexico can be sent
to CAFTA countries for assembly into garments that can then be shipped
duty free into the United States.This provision simply rewards textile
firms that have already moved from the United States to Mexico under
NAFTA.But it's also a major loophole to benefit China.
Why is that so? Because Mexico has long been a hotspot for illegal
textile transshipments from China. According to the Mexican Textile
Chamber of Commerce, 58% of all clothing sold in Mexico is smuggled in
from China. It seems that China, which is not a party to this
negotiation and has given up nothing in return, stands to gain
substantially from CAFTA.
Even the totally inadequate limits on non-CAFTA materials and
products eligible for duty-free treatment can only be maintained with
satisfactory customs enforcement throughout the CAFTA regions and
throughout the economies of any free trade partners. No serious
observer of the trade scene considers U.S. Customs enforcement to be
remotely adequate, and no significant budget resources for this mission
are anywhere in sight. Much worse, of course, is the customs situation
in our prospective CAFTA partners and other free trade partners like
Mexico. And significant improvement in these countries' customs systems
is a prospect even more remote than in the United States.
Additionally, we also must not ignore the determination of China
and other Asian textiles and apparel producers to maintain and increase
market share through whatever means necessary. The Chinese government
has put into effect a wide range of industrial subsidies aimed at
maintaining and increasing exports--especially to its leading market,
the United States. However, the United States has so far displayed
absolutely no willingness to respond to the Chinese and the Asian
subsidies.
CAFTA Sets a Precedent to Eliminate All ``Buy American'' Provisions
and Open US Government Procurement to Foreign Countries--Perhaps the
most disturbing loophole in the CAFTA agreement is one that most people
have never even heard.According to the U.S. Trade Representative's
official summary of the agreement, chapter nine of CAFTA establishes a
basic rule of ``national treatment'' in government procurement.This
means that each nation must treat goods, services, and suppliers from
the other CAFTA parties in a manner that is ``no less favorable'' than
domestic firms when awarding government contracts.In simple terms, that
means governments cannot treat their own citizens better than
foreigners, or use ``buy domestic'' policies to support their own
economies. And so, at a time when the U.S. is rapidly outsourcing both
its service and manufacturing jobs, CAFTA will make it illegal for any
state or federal agency to adopt a ``Buy American'' policy.
CAFTA Will Exacerbate the Devastating Impact of NAFTA and CBI--From
1997-2002, U.S. domestic manufacturers' share of the U.S. market fell
from 77.4% to 72.5%, despite an 18 percent gain in productivity. During
that same period, U.S. exports fell by $9.6 billion and the U.S. lost
2.3 million manufacturing jobs. Moreover, CAFTA will continue momentum
for further bad trade agreements that risk crashing the dollar and
igniting a global financial crisis that will take years to work
through.
In conclusion, USBIC's members can assure you that without dramatic
policy changes, many more domestic manufacturers will soon be forced to
close down. That means these companies will no longer be engines of
economic growth or pillars of community stability. Our employees will
go from taxpayers to consumers of government revenues--in unemployment
insurance, retraining, food stamps, Medicaid, and other forms of
government assistance. Pressures to enlarge the welfare state, with the
concomitant redistribution of our society's wealth, will grow
significantly stronger
To remain a true global economic and military superpower, and a
prosperous, stable society, the United States urgently needs entirely
new trade policies that support domestic manufacturing and its
resultant stable communities. Defeating CAFTA is the place to start.
Mr. Stearns. Thank you. Ms. Lee, welcome.
Ms. Lee. Thank you, Mr. Chairman.
Mr. Stearns. I think you have to turn your mike on.
STATEMENT OF THEA M. LEE
Ms. Lee. Thank you very much, Mr. Chairman, Congresswoman
Schakowsky, members of the committee. I really appreciate the
opportunity to come today and testify on behalf of the 13
million working men and women of the AFL-CIO on this extremely
important issue. I think you all know how important trade
policy is to our members, but the DR-CAFTA, the Central
American Free Trade Agreement I think is a pivotal policy
debate and one that is very important.
In our view CAFTA provides precisely the wrong answers to
the challenges faced both in Central America and the United
States. It is a failed model that will likely exacerbate
poverty and inequality in Central America while further eroding
good jobs and wages at home. At the same time, its successive
protections for multinational corporations will undermine the
ability of elected governments to protect public health, strong
communities, and the environment.
American workers and unions are not opposed to trade. We
believe that trade has the potential to lift people out of
poverty, to increase harmonious relations between nations, but
we also believe absolutely that the rules must adequately
balance competing interests and protect, in particular, the
most vulnerable members of society: workers, family farmers,
subsistence farmers, those needing affordable, life-saving
medications. And in our view U.S. trade policy has simply not
found that balance. We didn't find it in NAFTA, we didn't find
it in China's succession to the WTO, and we certainly haven't
found it in CAFTA. And instead of protecting the most
vulnerable and making sure that we have put, as Congresswoman
Schakowsky said, protection of workers' rights, the
environment, democracy at the very center of our trade
agreements, we have put them on the last page.
The key question facing us is not just whether CAFTA is an
okay agreement, a good enough agreement, but whether it
actually sets us back. And I would like to argue today that it
is not just that CAFTA is a disappointment, but that it
actually, in some key ways, is worse than the status quo,
particularly with respect to workers' right.
But I also wanted to just briefly say, in terms of U.S.
competitiveness and good jobs, like Kevin, like many of you,
like many of the statements that were made earlier today, we
have heard--the labor movement, American workers, my members
have heard over and over again that every new trade agreement
is about opening markets and selling more stuff. Just as Ms.
Vargo said, we are going to open up Central America's markets,
lower their tariffs, and American products will have a better
chance of being sold there. This is the exact same argument we
had in NAFTA.
And I actually wanted to correct one of the things that Ms.
Vargo said. She said that it is an entirely different situation
because Central America's market is already open to U.S.
products and Mexico's wasn't. In fact before NAFTA, U.S.
products going into Mexico faced a somewhat lower average
tariff than U.S. products today going into Central America on
average, just given the mix of things. And I can provide those
precise numbers for you if you are interested.
But with China PNTR, this is actually the most extreme
situation where in fact China didn't change their tariffs at
all--U.S. didn't change our tariffs at all. China lowered its
tariffs, and yet, still our trade deficit with China doubled
because the point is, these trade agreements are not about
selling more products, exporting more goods from the United
States, but are about facilitating outsourcing and off-shoring
of U.S. jobs. And that is why they never deliver the benefits
in terms of U.S. jobs and market access and competitiveness
that they are claim to.
In terms of workers' rights it is very simple. And I am
glad Mr. Gonzalez is here because I think his question deserved
a better answer than he got from Ms. Vargo. Under current U.S.
trade agreements, the GSP and the CBI, the U.S. can in fact
challenge inadequate labor laws in Central America. Under CAFTA
we cannot. The GSP, CBI does allow the removal of trade
benefits when countries are out of compliance. CAFTA only
allows trade sanctions if a country fails to pay a fine to
itself. This is a very, very different situation. I know both
Mr. Brown and Ms. Schakowsky raised this issue. The only
enforceable issue in CAFTA with respect to workers' rights is
that countries enforce their own labor laws.
Now, Ms. Vargo said that it is unlikely in her view that
countries would weaken their labor laws. Now, when we negotiate
trade agreements, we do not negotiate them for the most likely
scenario, we don't negotiate them for the best-case scenario,
we don't negotiate them assuming that our trade partners behave
themselves in areas that are of key importance to us. We
negotiate language that needs to be airtight. And the trade
agreements are in place not for 5 years, not for 8 years, but
for 50 years, 100 years, for future governments that we haven't
seen yet. We don't know whether those governments will in fact
weaken their laws.
And in fact right today in Guatemala, the government is in
fact making efforts to weaken their labor laws in ways that are
in violation of the commitment to meet ILO standards. So this
is not a hypothetical situation. This is a very real situation.
We are giving permanent and deeper market access to the Central
American countries, and we are weakening the labor rights
conditions attached to that.
And this is of key importance to Central American workers.
We have worked very closely with Central American unions and
worker activists who have told us they want the stronger worker
rights protections that they have today under GSP. Now those
aren't perfect. If they were perfect, then Central America
would be a workers' paradise today. But it is one little piece
of leverage that we have today, and as we open our market, we
are in fact gutting the workers' rights protection. And this is
too important an issue, both for American workers and for
Central American workers to overlook.
And I thank you very much for your time, and I look forward
to your questions.
[The prepared statement of Thea M. Lee follows:]
Prepared Statement of Thea M. Lee, Chief International Economist,
American Federation of Labor and Congress of Industrial Organizations
Mr. Chairman and members of the subcommittee, thank you for the
opportunity to testify today on behalf of the thirteen million working
men and women represented by the AFL-CIO. U.S. trade policy in general,
and DR-CAFTA in particular, are of enormous interest and importance to
our members and to America's workers.
In our view, CAFTA provides precisely the wrong answers to the
challenges faced in Central America and the United States. CAFTA
represents a failed model that will likely exacerbate poverty and
inequality in Central America, while further eroding good jobs and
wages at home. At the same time, its excessive protections for
multinational corporations will undermine the ability of governments to
protect public health, strong communities, and the environment.
Mr. Chairman, members of the subcommittee, we ask you to reject
CAFTA and urge the administration to renegotiate this deeply flawed
deal.
Any vote on CAFTA must take into account the broader economic
reality that we are facing today. Our trade deficit hit a record-
shattering $617 billion last year, we have lost close to three million
manufacturing jobs in the last four years, and average wages have not
kept pace with inflation this year--despite healthy productivity
growth. Offshore outsourcing of white-collar jobs is increasingly
impacting highly educated, highly skilled workers--leading to rising
unemployment rates for engineers and college graduates. Together,
record trade and budget deficits, unsustainable levels of consumer
debt, and stagnant wages paint a picture of an economy living beyond
its means, dangerously unstable in a volatile global environment.
Some CAFTA proponents have argued that opening Central America's
markets to U.S. goods will boost sales for U.S. producers, creating
high-paying export-related jobs at home. Proponents argue that this
will in turn help close the U.S. trade deficit and allow U.S. companies
to compete more effectively with China and other countries.
However, our experience under NAFTA demonstrates that the opposite
is likely to occur. As Republican Senator Olympia Snowe said recently
in the Senate Finance Committee hearing on CAFTA, NAFTA has cost U.S.
workers nearly one million jobs and job opportunities (based on the
deterioration in our trade balance with our NAFTA partners).
NAFTA was also supposed to open markets for American goods and
services, creating high-paying jobs at home and prosperity abroad.
Instead, in eleven years, the U.S. trade deficit with Canada and Mexico
ballooned to twelve times its pre-NAFTA size, reaching $111 billion in
2004. Imports from our NAFTA partners grew more than $100 billion
faster than our exports to them, displacing workers in industries as
diverse as aircraft, autos, apparel, and consumer electronics. This
occurred because U.S. companies did not take advantage of the easier
access to the Mexican market to export finished consumer goods to
Mexico; instead, they shifted production out of the United States to
Mexico, exporting parts and capital goods and importing finished
products. The net impact of these production shifts was a loss of good
jobs in the United States.
Those workers whose jobs were not eliminated also suffered.
Employers used the leverage of their new mobility and rights under
NAFTA to crush union organizing drives and win concessions at the
bargaining table, driving down wages and working conditions for
American workers. According to researchers at Cornell University, the
incidence of employers' threats to close and relocate factories grew
under NAFTA. And these intimidation tactics are very effective: workers
are half as likely to succeed in organizing a union when their
employers threaten to move jobs abroad.1
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\1\ Kate Bronfenbrenner, ``The Effects of Plant Closing or Threat
of Plant Closing on the Right of Workers to Organize,'' Dallas, Texas:
North American Commission for Labor Cooperation; 1997. Kate
Bronfenbrenner, ``Uneasy Terrain: The Impact of Capital Mobility On
Workers, Wages, and Union Organizing,'' Commissioned research paper for
the U.S. Trade Deficit Review Commission; 2000.
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NAFTA simply did not deliver stronger net exports or a competitive
advantage for U.S.-based companies and workers, and there is little
reason to believe that CAFTA will be any different. Like NAFTA, the
attraction of Central America for multinational corporations is not its
consumer market, but its low-paid and very vulnerable workforce.
The incremental market access for U.S. producers under CAFTA is
quite small, as the consumer markets in the DR-CAFTA countries are not
very significant. Many U.S. exports to the region are intermediate
inputs, which are assembled in the region and then exported back to the
United States.
And Central American assembly production is not the answer to
staying competitive with China. The competitive problems we face with
China require a direct solution which addresses the Chinese
government's currency manipulation, illegal subsidies, and egregious
repression of workers' rights and democratic rights head on. Getting
slightly better access to a small market will not come close to solving
those problems.
Some CAFTA proponents have made the desperate argument that CAFTA
is the only way to lift Central America out of poverty. Again, we need
only examine NAFTA's dismal track record to dispel this myth. Since
NAFTA was implemented eleven years ago, real wages in Mexico have
actually fallen, the number of people in poverty has grown, and the
number of people migrating illegally to the United States to seek work
has doubled. Trade liberalization in agriculture displaced nearly a
million rural small farmers, swamping the fewer jobs created in the
export processing sectors. Many in Mexico who supported NAFTA eleven
years ago have now turned into ardent opponents.
CAFTA is likely to have similar impacts in Central America,
especially since CAFTA does not dramatically increase access to the
U.S. market for the Dominican Republic and Central America. The key
impact on the rural poor--the majority of the population in many of the
countries--will be increased competition with much more efficient U.S.
agribusiness.
For industrial employment to be a reliable route out of poverty,
workers must earn decent wages, have the right to form independent
unions, and enjoy basic workplace protections and labor rights. Few
workers in Central America today can exercise their internationally
recognized rights to form unions and bargain collectively. Anti-union
violence is common, and employers routinely fire workers attempting to
exercise these rights, while governments fail to act. Far from
addressing or rectifying these concerns, CAFTA actually weakens the
labor rights conditions included in current U.S. trade programs,
leaving Central American and Dominican workers more vulnerable than
ever. I will address CAFTA's inadequate labor rights provisions in more
detail later in this testimony.
CAFTA PROVISIONS FAVOR MULTINATIONAL CORPORATIONS OVER WORKERS,
COMMUNITIES, AND NATIONAL GOVERNMENTS
CAFTA strengthens protections for multinational corporations,
forcing changes in intellectual property protection regimes that
threaten public health, giving corporations new rights to sue
governments over regulations they deem too costly or inconvenient, and
limiting the ability of future legislators to place conditions on
government procurement. This hurts Central America's prospects for
future development, just as it weakens state legislators and erodes
wages and jobs here at home.
The lopsided tilt toward corporate interests helps to explain why
CAFTA is so unpopular, both here in the United States and throughout
Central America. A recent poll by Americans for Fair Trade found
widespread opposition to CAFTA, with 74% of respondents saying they
would oppose the pact if it caused job losses, even if it also reduced
consumer prices. In Central America, tens of thousands of workers,
farmers, small-business owners, and other activists have taken to the
streets to voice their vehement opposition to the deal and to the lack
of transparency in the negotiation process.
The Bush administration and Central American governments have
prioritized multinational corporate interests at the expense of
ordinary citizens. Right now in Guatemala, the rights of people who
need inexpensive medications are being traded away in favor of CAFTA's
business interests. Pharmaceutical companies have already pressured
Guatemala to stop allowing inexpensive drugs in stores. CAFTA imposes a
five-to-ten year waiting period on generic drugs. The humanitarian
organization, Doctors Without Borders, has said that these provisions
in CAFTA could make newer medicines unaffordable.
CAFTA'S WORKERS' RIGHTS PROVISIONS UNACCEPTABLY WEAK
At the same time, despite the overwhelming evidence that Central
America's workers are routinely abused, CAFTA spectacularly fails to
address this problem. CAFTA's single enforceable workers' rights
provision requires only that countries enforce their own labor laws--
laws that Human Rights Watch, the International Labor Organization and
even our own State Department have documented as failing to meet
international standards. And CAFTA contains no enforceable provision
preventing countries from weakening or even eliminating their labor
laws entirely.
Not one country included in the CAFTA comes close to meeting a
minimum threshold of respect for the ILO's core labor standards:
freedom of association, the right to organize and bargain collectively,
and freedom from child labor, forced labor, and discrimination. In
Central America, maquiladora employers pay a workforce made up
disproportionately of young women poverty wages to labor for long hours
in unsafe conditions. When these workers try to organize to try to win
a voice at work, they face intimidation, threats, dismissal, and
blacklisting.
Labor laws in Central America uniformly fail to protect basic
workers' rights, and deficiencies in the laws have been repeatedly
criticized by the International Labor Organization (ILO), the U.S.
State Department, and independent human rights organization for many
years.2 Despite this criticism, these flaws persist today.
The ILO, in its 2003 and 2004 reports on Central American labor laws,
identified no fewer than 27 key deficiencies in the laws with respect
to freedom of association and the right to organize and bargain
collectively. Amazingly, the U.S. Trade Representative and Central
American countries continue to cite these reports as evidence that laws
in the region largely meet ILO standards--a gross mischaracterization
of the reports themselves. And even these reports, with all the
deficiencies they identify, omit some flaws that the ILO itself had
identified with regard to these countries in earlier observations
because of the reports' limited scope.
---------------------------------------------------------------------------
\2\ Such reports include: ``Fundamental Principles and Rights at
Work: A Labour Law Study--Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua,'' International Labor Organization, 2003; ``Fundamental
Principles and Rights at Work: A Labour Law Study--Dominican
Republic,'' International Labor Organization, 2004; ``2004 Country
Reports on Human Rights Practices,'' U.S. Department of State, 2005;
``2004 Annual Survey of Violations of Trade Union Rights,''
International Confederation of Free Trade Unions, 2004; and
``Deliberate Indifference: El Salvador's Failure to Protect Workers'
Rights,'' Human Rights Watch, 2003. A summary of these reports is
available in ``The Real Record on Workers' Rights in Central America,''
AFL-CIO, April 2005.
---------------------------------------------------------------------------
A review of the ILO reports and other ILO observations, along with
U.S. State Department reports and independent analyses by human rights
groups, reveals a wide array of loopholes, gaps, and deficiencies in
labor laws in the region. On issues including penalties for anti-union
discrimination, employer interference with workers' organizations,
obstacles to union registration, restrictions on the right to organize
above the enterprise level, restrictions on the rights of temporary
employees, onerous requirements for trade union leadership, limits on
the activities of federations and confederations, and limits on the
right to strike, labor laws throughout the region fail to meet the
minimum standards enumerated by ILO core conventions. The only country
to actually reform any of its laws in these areas during the CAFTA
negotiation process was Nicaragua; but some gaps in the law remain even
there. In every other country major deficiencies identified by the ILO
remain on the books today. In fact, some countries have actively
weakened their labor laws during the CAFTA negotiations: Guatemala's
Constitutional Court overturned key elements of major labor law
reforms, while the Costa Rican government introduced legislation to
weaken worker protections.
Employers take advantage of these weaknesses in the labor law to
harass, intimidate, and fire workers who dare to organize an
independent union. Employers refuse to bargain with legitimate worker
representatives, and have most strikes declared illegal. Even where
employers are flagrantly in violation of the law, they enjoy near total
impunity in many of these countries. The result is a climate of fear,
insecurity, and even physical danger for workers in the region who try
to exercise their most basic rights on the job.
As violation after violation of workers' rights accumulate, and as
governments refuse to improve their laws or enforce those that do
exist, the very institutions of independent trade unions and collective
bargaining founder. Trade union density in Central American countries
is minimal: 7 percent in Honduras, 5 in El Salvador, 3 in Guatemala. In
El Salvador, no independent trade unions have been registered in the
past four years. The most recent denial came this year, when the
Ministry of Labor found that port workers did not meet the legally
required minimum number to form a union, as a result of the fact that
their employer had fired most of the founding members of the union in
direct retaliation for their organizing activities.
There are only two collective bargaining agreements in force in
Guatemala's maquiladoras--zero in El Salvador's. In Costa Rica from
1999 to 2004, for every employer that negotiated a collective
bargaining agreement with a legitimate trade union, more than fourteen
employers negotiated direct arrangements with employer-dominated
solidarity associations. In Guatemala, 45 incidents of threats against
trade unionists were reported to the government in 2004--only one
conviction was achieved.
In the face of these inadequate labor laws, CAFTA only requires
that countries enforce the labor laws they happen to have. Obligations
to improve one's labor laws, to meet ILO standards, and not to derogate
from or waive laws in the future are all completely unenforceable under
CAFTA. Thus a country can maintain its laws far below ILO standards,
weaken its laws even further in the future, and face no consequences
under CAFTA. As the discussion above demonstrates, this is not just a
theoretical possibility in Central America--it is the reality that
workers live with every day.
CAFTA LABOR PROVISIONS A STEP BACK FROM JORDAN FTA AND GSP
CAFTA's failure to include an enforceable requirement that labor
laws meet ILO standards represents a step backwards from the labor
rights provisions of the U.S.-Jordan Free Trade Agreement. The Jordan
agreement enjoyed broad support from labor unions in the U.S. and
Jordan, and passed the U.S. Congress unanimously in 2001. The Jordan
agreement allows each one of its labor rights obligations to be brought
up under the agreement's dispute settlement and enforcement mechanism,
including provisions committing countries to meet ILO standards. In
contrast, CAFTA excludes the vast majority of its labor rights
obligations from the accord's dispute settlement and enforcement
mechanisms, and only the requirement that countries enforce their own
labor laws is subject to dispute settlement and enforcement.
CAFTA also backtracks from the Jordan agreement by giving labor
rights second-class status within the agreement's dispute settlement
and enforcement apparatus. In the Jordan FTA, the dispute settlement
and enforcement measures that apply to the agreement's labor provisions
are identical to those that apply to the agreement's commercial
provisions, and can include fines or sanctions. Under CAFTA, only
violations of the agreement's commercial provisions can lead to
sanctions or punitive fines sufficient to compensate the harm caused by
the violation. Violations of the agreement's labor obligation must be
remedied through the assessment of a non-punitive fine, and that fine
is capped at $15 million regardless of the harm caused by the
violation.
Perhaps most disturbing is the fact that CAFTA's rules on workers'
rights are actually weaker than the current labor conditions that apply
to Central American countries under our unilateral trade preference
programs, the Generalized System of Preferences (GSP) and the Caribbean
Basin Initiative (CBI). CAFTA's labor chapter backtracks from the labor
standards in GSP and CBI, and the agreement eliminates enforcement
tools currently available in the unilateral programs.
The GSP requires countries to have taken or be ``taking steps to
afford internationally recognized worker rights,'' while the
CBI instructs the president to consider ``the extent to which
the country provides internationally recognized worker rights''
when granting preferential market access under the program.
These rules enable workers to complain about the inadequacy of
national labor laws, not just about the government's failure to
enforce the law. CAFTA, on the other hand, only requires
countries to enforce the labor laws they happen to have, no
matter how weak those laws are now or become in the future.
The GSP includes a public petition process for the removal of trade
benefits. The AFL-CIO and other labor rights advocates have
used the process, in conjunction with unions in Central
America, to bring public pressure on Central American
governments to improve labor rights. Even when the U.S.
government exercises its discretion to reject meritorious GSP
petitions, the public forum provided by the petition process
can help focus public attention on workers' rights abuses and
pressure governments to reform. CAFTA contains no direct
petition process for workers--enforcement can only happen
through government-to-government disputes.
The GSP and CBI directly condition market access on respect for
international labor rights. While preferential benefits are
rarely withdrawn under the programs, the credible threat of
reduced trade benefits has successfully changed government
behavior. In addition, petitioners have been able to tailor
request for withdrawal to specific sectors and producers
responsible for workers' rights violations, helping to create a
specific incentive for employers to respect workers' rights.
CAFTA, on the other hand, makes it extremely difficult to
withdraw trade benefits for workers' right violations. Even if
a government has been found in violation of CAFTA's labor
provisions, it can continue to enjoy full market access under
the agreement as long as it pays a small, capped fine to
finance labor enforcement activities. The fine in no way
penalizes producers for violations of workers' rights, and
exerts little pressure on governments, who can reduce their
labor budgets by an amount equal to the fine and avoid spending
the fine on projects with political sensitivity such as labor
law reform.
The only tool that has helped create the political will to reform
labor laws in Central America in the past is our unilateral system of
trade preferences. While the labor rights provisions of these programs
are not perfect, they have led to some improvements in labor rights in
the region. In fact, nearly every labor law reform that has taken place
in Central America over the past fifteen years has been the direct
result of a threat to withdraw trade benefits under our preference
programs.
Even the United States Trade Representative (USTR) touts the
reforms that have been made to Central American labor laws as a result
of GSP petitions. USTR argues that the reforms demonstrate Central
American governments' commitment to workers' rights, and thus argue for
approval of CAFTA. Quite to the contrary, the reforms demonstrate that
governments in the region rarely undertake labor law improvements
without outside pressure--pressure that will no longer be applied if
CAFTA is ratified.
The U.S. government accepted a GSP workers' rights petition against
Costa Rica for review in 1993, and Costa Rica reformed its
labor laws later that year.
The Dominican Republic reformed its labor laws in 1992 in response to
a GSP petition on workers' rights.
El Salvador was put on continuing GSP review for workers' rights
violations in 1992, and the government reformed its labor laws
in 1994.
Guatemala reformed its labor laws in response to the acceptance of a
1992 GSP petition, and when their case was reopened for review
in response to a 2000 petition they again reformed their labor
laws in 2001.
Nicaragua's GSP benefits were suspended in 1987 for workers' rights
violations, and it reformed its labor laws in 1996.
The GSP process has also been helpful in addressing enforcement and
rule-of-law problems in the region. Too often, these patterns of
violation are the result not just of limited resources, but of
insufficient political will on the part of Central American
governments. GSP cases have helped create that political will. As the
result of a 2004 petition on El Salvador, for example, the Salvadoran
government finally enforced a reinstatement order for union activists
that had been locked out for three years. All appeals to national
mechanisms in the case had been fruitless, and the employer was in
outright defiance of a reinstatement order from the nation's Supreme
Court. The last independent union granted legal registration in El
Salvador was only registered after appeals to the Salvadoran Supreme
Court, the ILO, and a GSP petition.
Central American countries need a trade regime that will improve
compliance with fundamental workers' rights. As long as independent
trade unions are thwarted, collective bargaining avoided, and the right
to strike repressed, workers will be unable to win a voice at work and
negotiate with their employers for decent working conditions and wages
that reflect the true value of their production. Trade rules must
ensure that governments protect fundamental workers' rights, and
require that the companies who take advantage of the new rights and
mobility that trade agreements provide be held accountable for their
treatment of workers.
CAFTA fails this test. Rather than tie the incentives that
additional market access provides to required improvements in workers'
rights, CAFTA does exactly the opposite. While granting expanded and
permanent market access to Central American countries, CAFTA actually
reduces the labor rights conditions those countries are required to
fulfill under current trade programs. This failure is particularly
egregious in the Central American context--in countries where labor
laws fall far short of minimum international standards, where
governments have a record of indifference towards workers' rights and
hostility towards trade unions, and where the only tool that has proven
successful in improving workers' rights has been the threat of the
withdrawal of trade benefits.
It is time for policymakers to take an honest look at our trade
policy and the impact it has had on workers and communities at home and
abroad, and start revising the rules that govern trade. The American
labor movement, along with our brothers and sisters in Central America,
has made substantive and thoughtful proposals on what changes need to
be made to our trade policies.3 We recognize that trade has
the potential to spur growth and create jobs--but to deliver on these
promises, we need to get the rules right. Unfortunately, CAFTA
negotiators ignored our proposals.
---------------------------------------------------------------------------
\3\ See ``Labor Movement Declaration Concerning The United States-
Central America Free Trade Agreement,'' San Jose, Costa Rica, November
18, 2002. This declaration was signed by the labor federations of the
United States, Guatemala, Nicaragua, Costa Rica and El Salvador. It is
reprinted in, ``The Real Record on Workers' Rights in Central
America,'' AFL-CIO, April 2005.
---------------------------------------------------------------------------
As a result, we are forced to oppose CAFTA. We are working together
with unions, environmentalists, family farmers, bishops, women's groups
and many others in the U.S. and Central America to stop CAFTA and to
build a better way to trade. Only by rejecting CAFTA can we begin a
real dialogue on the new kinds of trade rules we need to create good
jobs, stimulate equitable and sustainable economic development, and
support strong democratic institutions.
In sum, CAFTA grants multinational companies that ship U.S. jobs
overseas the following rewards: greater access to the U.S. market, more
freedom to violate workers' rights with impunity, and the ability to
challenge government regulations enacted in the public interest.
CAFTA's rules on investment, government procurement, intellectual
property rights, and services create new rights for multinational
corporations, but the agreement actually weakens existing protections
for workers' rights, leaving the interests of ordinary working men and
women out in the cold.
Members of the subcommittee, I will close with these thoughts. The
U.S. economy continues to break records, but not in ways that help
working people. The all-time high U.S. trade deficit is not an abstract
issue; it shows up every day as working men and women see their plants
close, are asked to train their own overseas replacements or are asked
to swallow wage and benefit cutbacks that affect their families' lives
in hundreds of ways. Entire communities suffer the consequences of
failed trade agreements. We urge the Congress to reject CAFTA and begin
work on just economic and social relationships with Central America and
the Dominican Republic.
Mr. Stearns. Thank you. Mr. Cohen.
STATEMENT OF CALMAN J. COHEN
Mr. Cohen. Mr. Chairman, Congresswoman Schakowsky, members
of the committee, I welcome the opportunity to appear before
you to express the support for CAFTA as president of ECAT on
behalf of the Business Coalition for U.S.-Central America
trade.
Like its predecessor FTAs, CAFTA will promote new economic
opportunities, but it is not a panacea the many problems which
have been addressed during the hearing this morning and this
afternoon. It will not address every aspect of the U.S.-Central
America-Dominican Republic relationship. However, it is a
comprehensive, high-standard, and commercially meaningful
agreement that is very much deserving of the support of this
committee and the U.S. Congress for five reasons.
First, CAFTA levels the playing field and creates new
opportunities as you have heard already. Second, CAFTA will
promote growth and partnership in our own neighborhood. Over 20
years ago the Congress developed a model of economic engagement
to promote stability and growth in the Caribbean Basin. More
than two decades later the so-called CBI programs are no longer
sufficient. They are too cumbersome, too inflexible, and too
limited to withstand the pressure of the recent lifting of
global textile and apparel quotas, and companies in the region
have already started laying off thousands of workers. This is
extremely important from a U.S. perspective since the Central
American-Dominican Republic textile and apparel industry is the
second-largest source of economic activity in the region,
employing some half million workers in some of the best-paying
jobs in these countries. And this industry is the largest
export market for U.S. apparel manufacturers and yarn and the
second largest U.S. export market for fabric. The
competitiveness of the U.S. textile and apparel industries and
the future of their workers depend in significant part on
whether or not the Congress approves the FTA.
Third, CAFTA will promote improved working conditions in
this region. It is precisely through increased trade and
economic growth the developing countries are better able and
increasingly motivated to improve labor and environmental
standards. This is particularly important in the context of
CAFTA where nearly half of the population of the six countries
lives in poverty. Without CAFTA working conditions will not get
a much-needed boost. Indeed, they are likely to get much worse.
CAFTA also includes the most robust provisions yet on labor
capacity building, including the establishment of a council
that oversees a capacity-building mechanism. This capacity-
building mechanism and Congressional support for capacity
building are precisely what is needed to make a difference.
The agreement also includes strong and enforceable labor
provisions on labor rights that we believe are in fact stronger
than the Jordan FTA and stronger than the existing unilateral
trade preference programs. With few exceptions, CAFTA's labor
provisions are essentially the same as contained in the U.S.-
Jordan FTA. The key differences between the Jordan FTA and
CAFTA are, first, CAFTA clarifies what was implicit in the
Jordan FTA. CAFTA includes a provision specifically stating
that the only provision subject to dispute settlement is the
enforce-your-own-law standard. As President Clinton said in
submitting the Jordan FTA to the Congress, ``It is important to
note that the FTA does not require either country to adopt any
new laws in these areas, but rather includes commitments that
each country enforce its own labor and environmental laws.''
Second, the U.S.-Jordan FTA includes an underdeveloped
dispute settlement mechanism. The CAFTA, on the other hand,
contains a state-of-the-art, binding dispute settlement
mechanism.
The third deference is capacity building. The Jordan FTA
merely makes a statement that cooperative activities enhance
labor standards. CAFTA includes concrete provisions to promote
labor capacity building.
I then want to just briefly to go to a point that was
raised by Mr. Gonzalez. In determining the eligibility for
duty-free treatment, the trade preference programs prohibit the
designation of a country as a beneficiary if it has not taken
or is not taking steps to afford internationally recognized
worker rights. These provisions require a country's adherence
to internationally recognized worker rights as a condition of
eligibility, rather only that a country has or is taking steps.
In contrast, CAFTA builds upon the progress achieved by the
unilateral preference program by requiring each of the
countries to enforce its labor laws, subject to binding dispute
resolution. This is actually a very robust standard when you
consider what is already in their laws. For example, all but El
Salvador has ratified all eight of the ILO core conventions,
which, according to their own constitutions and laws, become
part of their national law. All have already incorporated in
their constitutions and/or their national law the broad ILO
labor standards.
Fourth, CAFTA's comprehensiveness is critical. During the
negotiations, the CAFTA countries sought to exclude certain
products and services completely from liberalization. In the
end U.S. negotiators succeeded in negotiating openings to all
of their key sectors and protecting ours.
Sugar is the most notable because the end result is
extremely far from what the CAFTA countries had sought. There
is very minimal increase in the sugar quota for these six
countries. The new access equals less than 1 percent of the
2003/2004 U.S. sugar supply. In addition, CAFTA includes a
compensation mechanism that would allow the restriction of
actual imports, but require the U.S. Government to compensate
these countries for any such restrictions.
My final point is that CAFTA is an important test for U.S.
leadership on trade. Concerns about laying the playing field
for American workers and farms can nowhere be better addressed
than in the WTO. But U.S. influence will be reduced if the
first FTA that the United States negotiates with a group of
developing countries is defeated over a modest increase in
sugar imports and because the labor provisions do not solve
every problem.
For all of these reasons I urge your support for the CAFTA.
Thank you.
[The prepared statement of Calman J. Cohen follows:]
Prepared Statement of Calman J. Cohen, President, Emergency Committee
for American Trade
Mr. Chairman, Congresswoman Schakowsky, Members of the Committee, I
welcome the opportunity to appear before you today to express strong
support for the U.S.-Central America-Dominican Republic Free Trade
Agreement (CAFTA) as President of the Emergency Committee for American
Trade (ECAT) and on behalf of the Business Coalition for U.S.-Central
America Trade, for which ECAT serves as the secretariat.
ECAT is an association of the chief executives of major American
companies with global operations who represent all principal
sectors of the U.S. economy. ECAT was founded more than three
decades ago to promote economic growth through expansionary
trade and investment policies. Today, the annual sales of ECAT
companies total $2 trillion, and the companies employ
approximately five and a half million people.
The Business Coalition for U.S.-Central America Trade is a coalition
of over 400 companies and associations representing all major
sectors of the economy with members in all 50 states that work
together in support of the implementation of the CAFTA. The
Business Coalition was formed as the negotiations started and
is working in strong support of Congressional approval of the
CAFTA.
The CAFTA is a comprehensive, commercially meaningful and high
standard agreement. I will focus today on why CAFTA deserves
your support.
THE HISTORY OF FREE TRADE AGREEMENTS
Twenty years ago tomorrow, former President Reagan sent to Congress
the first U.S. free trade agreement for Congressional approval--the
U.S.-Israel FTA. It was approved by the House by a vote of 422-to-0 and
by the Senate by voice vote. It was largely a political agreement that
included significant, but by no means perfect, market opening. Indeed,
the services aspects of the agreement were merely aspirational and the
dispute settlement provisions extraordinarily limited.
Since the U.S.-Israel FTA was approved in 1985, successive
Administrations, Republican and Democratic, have successfully sought
Congressional approval for eight additional FTAs, from our largest
trading partner Canada in 1989, the NAFTA in 1993, the Jordan FTA in
2001, and the Chile and Singapore FTAs in 2003 to the Australia and
Morocco FTAs in 2004.
Each of these FTAs, from the 19-page Jordan FTA negotiated by the
Clinton Administration to the several hundred pages of the Morocco FTA
negotiated by the Bush Administration, has three very important aspects
in common:
First, they seek to promote new opportunities for U.S. manufacturers,
farmers and service providers through the elimination of
barriers to U.S. consumer and industrial goods, farm products
and services.
Second, each FTA seeks to respond to the negotiating objectives set
forth by Congress in the trade negotiating authority
legislation (Trade Promotion Authority) that governs the
negotiation and Congressional approval of such agreements.
Third, each FTA sends a strong message to the rest of the trading
community about the United States' commitment to a rules-based
trading system and to more open markets with developed and
developing countries alike.
In each case, with the exception of the U.S.-Israel FTA, concerns
were raised that more should have been done to address various issues--
some within the context of the FTA, some outside. For example:
With the U.S.-Jordan FTA, environmental groups and others complained
about an extremely weak dispute settlement mechanism that would
allow any party to block dispute settlement proceedings in
perpetuity.
With NAFTA, complaints were raised about the decline in Mexican wages
prior to the conclusion of the FTA and how that would affect
American workers.
In some cases, provisions were included as part of the implementing
legislation to address related concerns--such as NAFTA Trade Adjustment
Assistance program. In other areas, the FTAs were simply not able, nor
intended, to address all facets of the relationship.
I would also note the importance of these agreements to opening
markets for U.S. exporters in particular. Based on 2004 data, U.S.
exports to the six countries with which the United States had an FTA in
2004 equaled $332.8 billion, accounting for 40 percent of total U.S.
exports worldwide; this does not include the Australia or Morocco FTAs
which were not in force in 2004. Let me say that again. Our FTAs with
our six FTA partners in 2004 accounted for 40 percent of total U.S.
exports.
CAFTA IS A STRONG AND IMPORTANT TRADE AGREEMENT, BUT IT IS NOT A
PANACEA
This background is important to put the CAFTA into the correct
context. Like its predecessors, it is a free trade agreement that seeks
to promote new opportunities for U.S. manufacturers, farmers and
service providers. It is not a panacea. It is not intended, nor did
Congress ask, that it address every aspect of the U.S.-Central
American-Dominican Republic relationship. While CAFTA makes important
progress in promoting economic growth in Central America and the
Dominican Republic, as well as U.S. exports, it cannot, for instance,
solve by itself the problems of poverty or subsistence farming in the
region.
While not perfect--no agreement ever is--CAFTA is very much
deserving of the support of this Committee and the U.S. Congress. From
the perspective of ECAT and the broader Business Coalition, I would
suggest that there are five key elements of the CAFTA that are most
important for your consideration.
FIRST: CAFTA LEVELS THE PLAYING FIELD FOR U.S. MANUFACTURERS, FARMERS
AND SERVICE PROVIDERS
Through unilateral preference programs overwhelmingly approved on a
bipartisan basis by Congress since the 1980s, some 75 percent of CAFTA
imports and 99 percent of CAFTA agricultural products already enter the
United States duty-free.
What CAFTA does for U.S. manufacturers, farmers and service
providers, is to make trade with our neighbors a two-way street. CAFTA
opens their markets to our goods and our services, which is
particularly important given that the six CAFTA countries already
represent the United States' 12th largest export market worldwide and
our second largest market in Latin America, after Mexico. In
particular, CAFTA eliminates tariffs, tariff rate quotas and non-tariff
barriers in all major sectors.
For U.S. Manufacturers, CAFTA immediately eliminates tariffs on more
than 80 percent of U.S. consumer and industrial goods when the
CAFTA enters into force, including on such key products as
information technology products, agricultural and construction
equipment, paper products, chemicals, and medical and
scientific equipment. CAFTA will eliminate all remaining
tariffs on all U.S. manufactured goods within 10 years. CAFTA
also eliminates other major non-tariff barriers to consumer and
industrial goods, including onerous dealer distribution
requirements that created enormous barriers for decades to the
ability of many U.S. companies to sell their products in these
countries.
For U.S. Service Providers, all six CAFTA countries committed to open
up their services market on a negative list basis (listing
exceptions to full market opening), with particular benefits
for telecommunications, financial, distribution, information
technology, audiovisual and entertainment, energy, transport,
construction, express delivery, professional and other
services. The six countries also committed to significant
provisions on regulatory transparency and independent
regulatory authorities. Of particular importance are Costa
Rica's commitments to open up key portions of its currently
closed telecommunications and insurance markets.
For U.S. Farmers, CAFTA eliminates tariffs on over half of U.S.
agriculture products immediately, with most remaining duties on
U.S. products phased out over 15 years. Since 99 percent of
their agricultural products already enter the U.S. market duty-
free, this is particularly important to provide reciprocity.
The agriculture provisions create significant new opportunities
in particular for U.S. producers of beef, pork, dairy, corn,
wheat and grains, soybeans, rice, cotton and processed foods.
For U.S. Creative and Scientific Industries, CAFTA establishes strong
rules for the protection of intellectual property that are
critical to promote innovation and new research in numerous
sectors, from information technology to chemical,
pharmaceutical and other scientific industries, and to
stimulate a rich and diverse marketplace for the development
and publishing of business information and creative works.
For U.S. Investors, CAFTA provides strong protections derived from
U.S. legal principles and practice, including, non-
discrimination, due process rights, prompt compensation for
expropriation, free movement of capital, no performance
requirements (such as local sourcing rules or export
requirements) and the resolution of disputes in a neutral and
objective forum. In accordance with Congress' directions in
Trade Promotion Authority, enacted as part of the Trade Act of
2002, the CAFTA also ensures that key protections conform to
U.S. legal principles and practice and that disputes are
handled transparently, efficiently and with public input.
Unlike any prior FTA, the CAFTA also provides a concrete
mechanism for the development of an appellate or other review
procedure to ensure the coherence of decisions.
SECOND: CAFTA WILL HELP PROMOTE GROWTH AND PARTNERSHIPS IN OUR
NEIGHBORHOOD
Over 20 years ago, former President Reagan and the Congress
developed a model of economic engagement to promote stability and
growth in the Caribbean Basin. The so-called Caribbean Basin Initiative
(or Caribbean Basin Economic Recovery Act--CBERA) provided duty-free
access to many goods from the CAFTA countries and the rest of the
Caribbean, in significant part to help stem the flow of communism by
promoting economic growth and the reduction of poverty.
More than two decades later, that program, which was expanded and
improved most recently through the Caribbean Basin Trade Partnership
Act (CBTPA), enacted as part of the Trade and Development Act of 2000,
helped this region emerge from a period of civil war, insurgency and
military dictatorship to democratic stability.
While CBI and CBTPA have been important drivers for economic
growth, they are no longer sufficient. The Central American-Dominican
Republic textile and apparel industry that these programs helped create
now faces extraordinary competitive pressures as a result of the
elimination of global quotas on textiles and apparel at the beginning
of 2005. The CBTPA program in particular is too cumbersome, too
inflexible and too limited to withstand this additional pressure, and
companies in the region have already started laying off thousands of
workers.
This is extremely important from a U.S. perspective, since the
Central American-Dominican Republic textile and apparel industry is the
second largest source of economic activity in the region--employing
some 500,000 workers in some of the best-paying jobs in these
countries. With an overall poverty rate of 47 percent and the largest
source of economic activity being subsistence agriculture, these
countries are facing a significant slowdown in employment and growth if
CAFTA is not passed. That has important consequences for working men
and woman in the six CAFTA countries, but it also has important
consequences for working men and women here in the United States since
these countries are the largest export market for U.S. apparel
manufactures and yarn and the second largest export market for U.S.
textiles. The competitiveness of the U.S. textile and apparel
industries and the future of their workers depend in significant part
on whether or not Congress approves the CAFTA.
With CAFTA, and the permanence, flexibilities and reciprocity it
creates for the U.S.-Central American-Dominican Republic textile and
apparel industries, U.S. workers in these industries will continue to
have markets in the six CAFTA countries. This will likely translate
into economic growth in these countries, making them a more vibrant
trading partner in the years ahead. Without CAFTA, these markets will
continue the downward slide that has already begun. And since most
Asian garments include little, if any, U.S. input, this has very
negative implications for U.S. textile and apparel workers.
THIRD: CAFTA BUILDS UPON THE EXISTING U.S. INTEREST IN PROMOTING
IMPROVED WORKING CONDITIONS THROUGH ECONOMIC GROWTH, CAPACITY BUILDING
AND A STRONG DISPUTE SETTLEMENT SYSTEM
As the World Bank and others have documented, it is precisely
through increased trade and economic growth that developing countries
are better able and increasingly motivated by growing working and
middle classes to improve labor and environmental standards. Since
World War II, the liberalization of trade has helped produce a six-fold
growth in the world economy and a tripling of per capita income and
enabled hundreds of millions of families to escape from poverty and
enjoy higher living standards. The World Bank has documented that
developing countries that participate actively in trade grow faster and
reduce poverty faster than countries that isolate themselves. In the
1990s, per capita incomes grew 5.1 percent in developing countries with
high trade and investment flows, while more isolated countries saw
incomes decline by 1.1 percent. Contrary to many popular perceptions,
NAFTA has also been found to have a positive effect on wage levels and
the reduction of poverty in Mexico. While it is alone not enough to
produce gains for all workers in Mexico, NAFTA has had very positive
effects.
The relationship between economic growth and labor rights is
particularly important, given that nearly half of the population of the
six CAFTA countries lives in poverty and Nicaragua is the second
poorest country in the hemisphere, after Haiti. Without CAFTA, working
conditions will not get a much-needed boost. In fact, they are likely
to get much worse with the loss of some of the best-paying jobs in
these countries in the textile and apparel sector. CAFTA, by creating
new opportunities and making them permanent, has the ability to reverse
the downslide and loss of thousands of jobs that we have seen in these
countries since global textile and apparel quotas were lifted.
CAFTA also includes the most concrete provisions yet on labor
capacity building that will promote strong improvements in the lives of
workers. In particular, CAFTA would establish a Labor Affairs Council
that will oversee a Labor Cooperation and Capacity Building Mechanism
to:
establish capacity-building priorities, including with respect to
``fundamental rights and their effective application,'' worst
forms of child labor, labor administration and inspection
systems.
develop specific cooperative and capacity-building activities.
exchange information on laws and practices and ways to strengthen
them.
seek support from the ILO, Inter-American Development Bank, World
Bank and Organization of American States to advance common
commitments.
seek input from worker and employer representatives and the public.
Capacity building by the ILO and other institutions has, over the
years, resulted in very concrete progress in working conditions in the
region and throughout the world. In Central America, for example, ILO
technical assistance through the IPEC (International Programme for the
Elimination of Child Labor) has provided concrete assistance to tens of
thousands of children involved in child labor and their parents. Much
more remains to be done to improve working conditions, but it is most
often the lack of resources and technical ability, not particular laws,
that limit improvements in labor conditions. CAFTA's capacity building
mechanism and Congressional support for capacity-building programs are
precisely what is needed to make an important difference. In this
regard, I would note the existing commitments by the U.S. and by the
Central American/Dominican Republic governments to labor capacity
building:
The Administration began its first CAFTA-related labor project before
the agreement was even concluded, with a $6.75 million grant to
the Foundation for Peace and Democracy to help improve working
conditions in the region. In the FY 2005 Appropriations Act,
Congress allocated $20 million for labor and environment
capacity building for the CAFTA countries.
On April 4, 2005, the six CAFTA countries made a strong and
unprecedented public commitment to continue to improve labor
standards and their implementation by endorsing the
recommendations in the very detailed report on their labor laws
and working conditions--The Labor Dimension in Central America
and the Dominican Republic--prepared by their trade and finance
ministries in conjunction with the Inter-American Development
Bank. The report identifies specific areas where the countries
need to improve labor standards and implementation and where
additional technical assistance is required.
CAFTA is not meant to be, nor could it be, a panacea; yet it
represents a much-needed modernization of the U.S.-Central American-
Dominican economic relationship that will promote better working
conditions through economic opportunities and a strong capacity-
building program in the region.
Beyond the economic opportunities and capacity building that CAFTA
will promote, the agreement itself includes strong and enforceable
provisions on labor rights. I know this is a much debated subject, so I
will focus my remarks on the two often-heard critiques of CAFTA with
which I strongly disagree--that it is weaker than the Jordan FTA and
weaker than existing unilateral trade preference programs:
1. CAFTA HAS VERY SIMILAR, IF NOT STRONGER, LABOR PROVISIONS THAN THE
U.S.-JORDAN FTA.
With few exceptions, CAFTA's labor provisions are essentially the
same as contained in the U.S.-Jordan FTA. The commitments are largely
the same, except in those cases where CAFTA strengthens them or adds
new commitments, such as to ensure access to fair, equitable and
transparent tribunals for labor law enforcement. The key differences
between the U.S.-Jordan FTA and CAFTA are:
CAFTA Clarifies What Was Implicit in the Jordan FTA. CAFTA includes
a provision specifically stating that the only provision subject to
dispute settlement is the ``enforce-your-own-law'' standard. This
provision essentially clarifies the fact that the enforce-your-own-law
standard is the only language in either the Jordan FTA or CAFTA that
expresses an enforceable commitment as opposed to a hortatory
objective. Indeed, the CAFTA clarifies the point former President
Clinton made when he transmitted the U.S.-Jordan FTA to Congress on
January 6, 2001:
``The FTA joins free trade and open markets with civic
responsibilities. In this Agreement, the United States and
Jordan affirm the importance of not relaxing labor or
environmental laws in order to increase trade. It is important
to note that the FTA does not require either country to adopt
any new laws in these areas, but rather includes committments
that each country enforce its own labor and environmental
laws.'' (emphasis added).
This statement was obviously not made because Jordan had perfect
labor laws. Indeed, as the 2004 State Department Report on Human Rights
found: ``[Jordan's] [l]abor laws mandate that workers must obtain
Government permission to strike. Unions generally did not seek approval
for a strike, but workers used the threat of a strike as a negotiating
tactic. Strikes are prohibited if a labor dispute is under mediation or
arbitration.'' (emphasis added).
CAFTA Contains a More Developed and Binding Dispute Settlement
Mechanism. The U.S.-Jordan FTA includes an underdeveloped dispute
settlement mechanism that lacks strict time limits for the appointment
of panelists, meaning that complaints can be blocked in perpetuity. In
the case of the CAFTA, the dispute settlement procedures with respect
to labor and environmental issues are much more detailed and developed
and result in binding panel reports, with strict time limits for the
establishment of panels and potentially the imposition of monetary
assessments or trade sanctions. Panels are authorized to review a
Party's commitment to enforce its labor and environmental laws as
sought by the Trade Promotion Authority negotiating objectives. If a
panel finds that a Party is failing to enforce such laws and that the
Party does not bring its actions into accordance with the FTA
obligations, the other Party is authorized to assess a monetary penalty
that will be used for improving labor or environmental conditions in
the complained of Party. If that monetary penalty is not paid, the
complaining Party ``may take other appropriate steps to collect the
assessment or otherwise secure compliance . . . [including] suspending
tariff benefits under the Agreement as necessary to collect the
assessment . . .''
CAFTA Contains a Robust Capacity-Building Mechanism. The U.S.-
Jordan FTA contains merely a statement that cooperative activities may
enhance labor standards. CAFTA, as discussed previously, includes the
most concrete provisions included in any FTA on labor capacity
building--provisions that are likely to have a much more important
effect than dispute settlement in promoting enhanced labor conditions.
2. CAFTA REPRESENTS A STRONGER WORKER RIGHTS MODEL THAN UNILATERAL
PREFERENCE PROGRAMS
In determining eligibility for duty-free treatment, the Generalized
System of Preferences (GSP), CBTPA and CBERA prohibit the designation
of a country as a beneficiary if it ``has not [taken] or is not taking
steps to afford internationally recognized worker rights' and not
implementing its commitments to eliminate the worst forms of child
labor. CBTPA also provides that the President should consider the
``extent to which the country provides internationally recognized
worker rights.''
As language of GSP, CBTPA and CBERA makes clear: these provisions
do not require a country's adherence to internationally recognized
worker rights as a condition of eligibility; rather only that a country
has or is taking ``steps.'' Indeed, in considering the CBTPA bill on
the Senate floor, the proposal to condition CBTPA benefits on a
country's compliance with internationally recognized worker rights (S.
Amdt No. 2847) was rejected by more than a two-to-one margin.
While GSP, CBTPA and CBERA have been used by successive
Administrations to help promote improvements in the labor standards in
the Caribbean Basin countries, both the Clinton and Bush
Administrations have repeatedly found that all six of the CAFTA
countries have satisfied the taking ``steps'' standard of these
programs. Indeed, in October 2000, the Clinton Administration
designated all 24 Caribbean Basin countries as eligible for the new
CBTPA benefits.
CAFTA builds upon the progress achieved by the unilateral
preference programs by requiring each of the CAFTA countries to enforce
its labor laws, which the unilateral preference programs helped
improve. This obligation is subject to binding dispute settlement,
including potential monetary assessments and trade sanctions. Given
that each of the CAFTA countries has already adopted robust treaty and
constitutional, as well as national law, labor protections provisions
and CAFTA requires actual adherence to those laws, CAFTA actually
provides a much stronger framework than the existing preference
programs. Consider:
All but El Salvador have ratified all eight of the ILO core
conventions (El Salvador has ratified six), which, according to
their own constitutions and laws, become part of their national
law.
All but the Dominican Republic have already incorporated in their
constitutions all of the broad core ILO standards--the rights
of freedom of association and collective bargaining and
prohibitions against discrimination, child labor and forced
labor.
All six CAFTA countries have very detailed national laws on labor
rights covering all four core ILO labor principles, including
many of the key provisions called for in the very detailed ILO
conventions.
The CAFTA countries recently committed to strengthening labor
standards and enforcement in their countries as recommended in
The Labor Dimension in Central America and the Dominican
Republic, endorsed by the Trade and Labor Ministers of each of
the six CAFTA countries.
Even more importantly, the CAFTA mechanism also includes an
institutional framework to support labor capacity building within the
CAFTA countries, the very activities that together with economic
development are likely to have the greatest impact on improving working
conditions within the region.
Suggestions that CAFTA, unlike the unilateral preference programs,
will allow countries simply to repeal strong labor provisions ignore
several key facts:
That the labor language of the unilateral preference programs in fact
allows countries to move backward, requiring only that a
country has or is taking ``steps.''
That the labor protections in the CAFTA countries are embedded in
their constitutions and international treaties and, as a
result, would be very difficult to undo if these countries
wanted to.
That CAFTA requires each country to ``strive to ensure that its laws
provide for labor standards consistent with the internationally
recognized labor rights' and to improve those standards in that
light.'' The six CAFTA countries also made the unprecedented
commitment to continue to improve labor standards and their
implementation by endorsing the recommendations in The Labor
Dimension in Central America and the Dominican Republic.
That CAFTA provides for ongoing work through a robust capacity-
building mechanism to help each country with regard to labor
issues, including fundamental rights and their effective
application, and the worst forms of child labor, which are
specifically included as subjects for labor capacity building
in the CAFTA labor chapter.
We can debate at length the legal provisions in the CAFTA, compared
to the U.S.-Jordan FTA, the trade preference programs or even NAFTA.
Yet, I think it is critical to reemphasize that CAFTA's real power in
improving labor conditions in the region is through economic
opportunities and growth and a concrete capacity-building framework
that Congress has a strong voice in promoting and sustaining. Without
CAFTA, there are reduced economic opportunities; in fact there are
likely to be significant job losses in the region. Without CAFTA, there
is no framework or plan of action to improve working conditions through
capacity building in the region. In short, we strongly believe that
CAFTA provides a much stronger framework for promoting working
conditions in the region.
FOURTH: CAFTA'S COMPREHENSIVENESS IS CRITICAL
ECAT and many in the Business Coalition have been working on this
agreement even prior to the start of actual negotiations in January
2003. What we sought on behalf of the U.S. manufacturers, service
providers and farmers that make up our groups was a comprehensive
agreement that provided new access in all areas. As the negotiations
progressed, it was very clear that the CAFTA countries, which already
enjoy significant duty-free access into the United States, wanted to
exclude certain products and services completely from liberalization--
largely agricultural products and key service sectors, particularly in
Costa Rica. At the same time, their negotiators sought substantial new
access in areas in which they remained restricted in the United States,
most notably textiles and apparel and sugar. In both areas, U.S. and
the CAFTA countries' negotiators reached compromises that provided
significant protections to U.S. interests.
Sugar is most notable because the end result is extremely far from
what the CAFTA countries had sought. There is a very minimal increase
in the sugar quota for these six countries--109,000 metric tons in year
one that will increase to 153,000 metric tons by year 15. This new
access--which will entail no final reduction of the tariff on sugar--
equals less than one percent of the 2003/2004 U.S. sugar supply and
less than seven percent of U.S. imports of sugar. In addition, CAFTA
includes a compensation mechanism that would allow the restriction of
actual increased imports, but require the U.S. government to compensate
these countries for any such restrictions.
Failure to include any increased sugar access in the CAFTA would
have resulted in a negotiating dynamic that could easily have unraveled
the very significant new access provided to all other parts of U.S.
agriculture, U.S. manufacturing and U.S. services. Instead of the
elimination of tariffs on all beef, pork, rice, soybean, poultry and
other key crops, the agreement would have been a patchwork of
exceptions.
And that brings me to my last point.
FIFTH: CAFTA IS AN IMPORTANT TEST FOR U.S. LEADERSHIP ON TRADE
For many U.S. companies, the most significant trade negotiation is
the ongoing WTO Doha Development Agenda. It has had a rocky several
years and only last summer seemed to be moving forward in earnest as a
result of the so-called Framework Agreement. Yet, our negotiators are
now faced with perhaps the most difficult period as they work to
promote commitments by other countries to significant new access for
U.S. farm and manufactured goods and U.S. services.
CAFTA represents an important test for the United States. It is the
first time that the United States has negotiated an FTA with a group of
developing countries. If opponents to CAFTA are successful and CAFTA is
not approved, what type of message would that send to developing
countries around the world with which the United States is trying to
build coalitions to support new access in Europe, Japan and elsewhere?
How does the United States explain that it is scared of six small
countries in its own neighborhood over a modest increase in sugar
imports and because the labor provisions do not solve every problem?
Concerns that many on this Subcommittee have expressed about
leveling the playing field for American workers and farmers can nowhere
be better addressed than in the WTO, but U.S. influence in the Doha
Development Agenda will be reduced if the CAFTA is not approved.
With CAFTA, on the other hand, we have expanded our block of
countries that support common goals and common principles. The WTO Doha
Development Agenda will still be a difficult negotiation, but we will
have allies in the developing world with which to move forward.
CAFTA will benefit the United States and our manufacturing,
services and agricultural producers and workers through the expansion
of markets, renewed partnerships to advance the competitiveness of
U.S.-Central American-Dominican industries, and the development of a
stronger, more stable hemisphere. It will level the playing field for
our workers by eliminating barriers in these six countries. It will
also help improve working conditions in the region through new economic
opportunities and a robust and focused capacity-building mechanism. On
behalf of ECAT and the Business Coalition, I strongly urge your support
for this agreement.
Mr. Stearns. I thank the gentleman. Mr. Vargo.
STATEMENT OF FRANK VARGO
Mr. Frank Vargo. Thank you very much. I am very pleased to
be here, Mr. Chairman and Congresswoman Schakowsky.
The National Association of Manufacturers is extremely
supportive of this agreement. It is a great agreement despite
everything you have heard against it. In trying to think of
what is really important here, though, is there anything I
could say to the subcommittee today, I thought I would quote
the President. It is always a useful thing to do. Something the
President said on April 12. The President said, ``It is of
vital importance to every nation of this hemisphere that the
American Governments individually take, without further delay,
such action as may be possible to abolish all unnecessary and
artificial barriers and restrictions which now hamper the flow
of trade between the peoples of the American Republics.''
Now, this wasn't President Bush, although it could have
been. He said pretty much the same thing. Because this was
April 12, 1933 when the President was Franklin Delano
Roosevelt, and the occasion was the introduction of the Good
Neighbor Policy. And that is fundamentally what CAFTA is really
most importantly about. It is about being good neighbors. It is
about the United States working with its neighbors, and our
neighbors can benefit us in this instance as well.
When we look at this agreement, you know, people just keep
acting as though we don't already have an agreement. It is a
one-way agreement. It has been a one-way agreement. The United
States has been very generous, and now in response for making
this agreement permanent, these countries are saying we will
give you the open access to our market. In the NAM's estimate,
and it is available to you, is that we can pick up $1 billion
of manufactured exports here because we will be more
competitive than the European or Japanese or other competitors
in Central America.
More importantly, we will save--it could be up to $4
billion of exports that would otherwise be at risk if these
countries lose their apparel industry to China or other Asian
producers. Why? Because they sell $10 billion of apparel to us.
We have 40 percent of their market. If they lose $10 billion to
us, they are not going to pick it up elsewhere. They will have
to cut their imports $10 billion. On average, then, they will
have to cut their imports from us $4 billion. Does anybody up
there think that if China picks up $10 billion of textile
exports to the U.S., they are going to spend $4 billion in the
United States? I certain don't.
When we look at the impact on their economy, again, if they
were to lose their apparel industry, half a million people, you
know, the political instability that could be generated is
something you all ought to contemplate. But we looked at the
figures; it is also equivalent to 7 percent of their GDP. If
they lost 7 percent of their GDP, that is something that would
not contribute to their stability, would not be helpful for
migration to the United States.
And as far as I can tell, there are really two problems
that people are saying: sugar and the labor standard. Now,
sugar really got a good deal. It is a sweetheart deal. The
Secretary of Agriculture, all the analysis indicates prices
aren't going to come down, the sugar industry is not going to
be hurt. The sugar industry is concerned about a slippery
slope. You can't take agreements on what other agreements might
or might not be in the future. This is a good agreement. The
sugar industry, frankly, should say thank you for what they
have here and let us get on with it. Because the NAM and I
think other agricultural sectors are not going to sit by and
let a good agreement--and let our whole trade policy, if you
will, be paralyzed by sugar the way Japan's trade policy has
been paralyzed by rice all these years. It is a good agreement.
We should move on with it.
Now, labor rights, in essence what I am hearing is until
these countries clean up their labor act, until they have
perfect labor laws or very good labor laws--perhaps better than
ours in some instances; we can't meet the ILO standards--we
don't want them to lower their tariffs to us. And to me that
makes no sense. We want them to lower their tariffs, we want
this agreement, and we will work with them to improve labor
conditions. The worse thing you can do for labor conditions
there is put a half million people out of work.
A lot has been said that CAFTA and NAFTA--let me make just
a couple of points quickly, Mr. Chairman. People blame NAFTA as
being kind of the root of all trade evil. You know, with
manufactured goods, we have about a $500 million trade deficit.
Now, $49 billion of that is with NAFTA, less than 10 percent.
$25 billion is with Mexico, less than 5 percent. And 95 percent
is outside. We have four times the deficit with the European
Union in manufacturers than we do with Mexico. NAFTA has
contributed about two-thirds of our entire export growth. If we
had the other countries of the world, if our exports to them
and imports with them had grown the same as with NAFTA, our
global trade deficit would be about $200 billion less than it
was. And conversely, if our exports and imports with NAFTA had
performed as they did with the rest of the world, our deficit
with NAFTA would have been three times as large.
Our trade agreements aren't the problem. They are part of
the solution. We are a very, very open market. Today, as we
speak, 70 percent of everything we bring in to the United
States comes in duty-free. We have a lot of barriers overseas.
We want those barriers down. Some people suggest the way to do
that is withdraw from the trading system; let us have global
trade anarchy; we are a big country; we will push others
around. Yes, we tried that in the 1930's. The only way to get
trade barriers down in other countries is through trade
agreements, and that is what we want. And this is a good trade
agreement. It is an excellent trade agreement. And it is a
trade agreement with six little struggling countries whose
economy is the size of Sacramento, California.
I live in the greatest country on earth. I don't want that
country to turn to the rest of the world and say we were afraid
to enter into an agreement with Sacramento, California because
it was going to devastate our economy.
Thank you, Mr. Chairman.
[The prepared statement of Frank Vargo follows:]
Prepared Statement of Franklin J. Vargo, Vice President, International
Economic Affairs, National Association of Manufacturers on Behalf of
the National Association of Manufacturers
Mr. Chairman and Members of the Subcommittee: I am pleased to
testify today on behalf of the National Association of Manufacturers
(NAM) to provide a perspective on the U.S.-Central America-Dominican
Republic and Free Trade Agreement (CAFTA-DR). The National Association
of Manufacturers is the nation's largest industrial trade association,
representing small and large manufacturers in every industrial sector
and in all 50 states. Headquartered in Washington, D.C., the NAM has 10
additional offices across the country. All of our members are affected
directly or indirectly by trade and have a keen interest in the factors
affecting our trade and international economic relations.
The U.S.-Central America-Dominican Republic Free Trade Agreement
(CAFTA-DR) is unambiguously a winner for U.S. manufacturing. The NAM
strongly supports this comprehensive agreement. It levels the playing
field for U.S. producers by providing the same access to DR-CAFTA
markets that their producers enjoy in the U.S. market.
Under CAFTA-DR, U.S. manufactured goods exports will become duty-
free (80% as soon as the agreement goes into effect), while European
and other competitors will continue to face CAFTA-DR's tariffs and
other trade barriers. As a direct result, U.S. manufacturers stand to
gain $1 billion of additional manufactured goods exports, with
approximately 12,000 related job opportunities for American workers,
according to an analysis by the NAM.
More significantly, CAFTA-DR could preserve up to four times that
amount of existing U.S. exports. Without the agreement, CAFTA-DR
countries are at severe risk of losing their $10 billion of apparel
exports to the United States to Asian competitors, and would have to
cut their global imports by $10 billion--over 40% of which would be
lost U.S. exports worth $4 billion, affecting 48,000 U.S. jobs.
The agreement also strengthens the ability of U.S. and Central
American producers to compete against China and other Asian
competitors. If the CAFTA-DR countries lost their apparel industry to
Asian producers, 550,000 people could be put out of work in the region.
Loss of their apparel exports to the United States would cause the
region's GDP to fall about 7 percent, putting their economies into
serious recession and slashing U.S. exports to the region.
Currently, 80% of U.S. imports from CAFTA-DR are duty-free--due to
the one-way market access programs already provided to them; moreover,
excluding textiles, 93% of U.S. manufactured goods imports from CAFTA-
DR already are duty-free.
While the agreement has significant potential to maintain existing
CAFTA-DR exports to the United States, it is unlikely to generate
significant new net manufactured goods imports into the United States.
This is because the CAFTA countries already have open access to the
U.S. market for almost all manufactured goods. Moreover, the six CAFTA
countries together have an economy of only $77 billion. That makes
their combined economy about the size of Sacramento, California!
THE CAFTA-DR FREE TRADE AGREEMENT
The U.S.-Central American-Dominican Republic Free Trade Agreement
(CAFTA-DR) would increase trade among the United States and Costa Rica,
the Dominican Republic, El Salvador, Guatemala, Honduras, and
Nicaragua. The free trade agreement (FTA) will eliminate tariffs to
agricultural and manufactured goods, and would improve the rules
governing trade--such as by strengthening intellectual property
protection, increasing safeguards against product counterfeiting and
copyright piracy, strengthening investment rules, opening access to
government procurement, facilitating electronic commerce, speeding
customs processing, encouraging express delivery, and opening
financial, telecommunications and other services markets.
It is important to stress the comprehensive nature of the
agreement's coverage, and also its very strong and positive
contributions toward improving both labor and environmental conditions
in the CAFTA-DR region.
The CAFTA-DR countries already enjoy almost completely open access
to the U.S. market, but maintain significant barriers to U.S. exports.
The agreement would level the playing field for U.S. producers by
providing the open access to the CAFTA-DR countries that they already
have in the U.S. market because of the one-way market access programs
provided to them by the United States in earlier years. The agreement
would benefit the CAFTA-DR countries by making their access to the U.S.
market permanent and by bolstering the region's ability to compete
against Asian producers.
U.S. MANUFACTURED GOODS TRADE WITH CAFTA-DR
The CAFTA-DR region imported $15.7 billion of U.S. goods in 2004,
as shown in Table 1., making it the 13th largest export market for the
United States. In the Western Hemisphere the CAFTA-DR market is second
only to Mexico as a market for U.S. exports. It is a larger market for
the United States than Brazil, even though Brazil's economy is
considerably larger than the combined economies of the CAFTA-DR
countries.
Manufactured goods predominate U.S. trade with the CAFTA-DR
countries. Fully 87 percent of U.S. exports and 83 percent of U.S.
imports are manufactured goods. Textiles and apparel are the largest
category of goods traded, accounting for about 55 percent of U.S.
imports and over one-fourth of U.S. exports. U.S. textile exports
consist principally of fabric and other textiles that are inputs into
CAFTA-DR apparel production that is exported back to the United States
under existing preference programs. CAFTA-DR accounts for nearly 30
percent of U.S. textile exports to the world.
U.S. manufactured goods trade with the CAFTA-DR countries typically
runs a small deficit overall, but a large and growing surplus in non-
textile/apparel areas, as is shown in Table 1. Last year's manufactured
goods deficit was $1.1 billion, comprised of a $5.4 billion deficit in
textiles and apparel trade and a $4.3 billion surplus in all other
manufactured goods trade. Paper and paper products, chemicals, motor
vehicles and other transportation equipment, machinery, and electrical
equipment and appliances are significant U.S. manufactured goods
exports to the region.
Table 1
U.S. Merchandise Trade with CAFTA-DR, 2004
Millions of Dollars
------------------------------------------------------------------------
Exports Imports Balance
------------------------------------------------------------------------
Total............................ $15,731 $17,663 -$1,932
Manufactured Goods............... $16,328 $14,719 -$1,091
Textiles and Apparel........... $4,244 $9,679 -$5,435
Other Manufactured Goods....... $9,384 $5,040 $4,344
Other Goods...................... $2,103 $2,944 -$841
------------------------------------------------------------------------
Source: U.S. Census Bureau Trade Stastics.
The United States is region's major trading partner. Using trade
statistics of the six countries as compiled by the International
Monetary Fund (IMF), the U.S. share of CAFTA-DR's global imports was 41
percent.
Table 2
CAFTA-DR Imports from the World and U.S., 2003
------------------------------------------------------------------------
2003 Total
2003 Total CAFTA-DR
Imports Imports U.S. Import
from World, from the Market
$ millions U.S., $ Share, %
millions
------------------------------------------------------------------------
CAFTA-DR total................... 36,627 14,968 41%
Costa Rica....................... 7,663 1,775 23%
Dominican Republic............... 8,082 4,214 52%
El Salvador...................... 5,763 2,881 50%
Guatemala........................ 7,339 2,501 34%
Honduras......................... 5,894 3,129 53%
Nicaragua........................ 1,887 469 25%
------------------------------------------------------------------------
Source: International Monetary Fund.
The United States is also the CAFTA-DR region's largest customer.
IMF data show that in 2003 the CAFTA-DR countries exported $24.6
billion to the world. U.S. imports from the region that year were $16.9
billion, nearly 70 percent of the CAFTA-DR countries' global exports.
By far their most important export is their shipments of apparel to the
United States, which in themselves comprise 40 percent of the region's
total exports of all products to the world.
HOW THE CAFTA-DR AGREEMENT WILL EFFECT U.S. EXPORTS
The CAFTA-DR free trade agreement has the potential to have a
significant effect on U.S. exports. There will be three types of
effects: (1) expansion of U.S. exports stemming from the reduction and
elimination of CAFTA-DR tariffs on U.S. production; (2) expansion of
U.S. exports through the reduction of non-tariff barriers in the CAFTA-
DR countries and the trade facilitation measures they are committed to
take; and (3) preservation of existing U.S. exports that would
otherwise be lost if CAFTA-DR garment production shifted to China or
other Asian nations.
Together, these three effects could total to as much as $5 billion.
The tariff effect would be roughly $1 billion. Non-tariff effects are
important and positive, but difficult to quantify. By far the largest
of the effects would be the preservation of existing U.S. exports that
would be saved by reducing or preventing the loss of CAFTA-DR
production to China and other Asian nations, a loss that would result
in a sharp reduction in the amount of goods the CAFTA-DR region buys
from the United States.
TARIFF EFFECTS
Producers in the CAFTA-DR region already have very open access to
the U.S. market, while U.S. producers face significant trade barriers
in attempting to sell into their markets. Thus the agreement can be
expected to have a stronger expansion effect on U.S. exports than on
U.S. imports. U.S. manufactured goods exports to the CAFTA-DR region
face tariffs that, on a weighted average by major product groups, are
generally in the 4 to 10 percent range, as is shown in Table 3. These
tariff averages reflect both very low tariffs but also tariffs that are
in the range of 15-20 percent or even higher.
In examining the likely effects of tariff elimination, the NAM
utilized an econometric trade substitution model. This model was
applied to all U.S. manufactured goods exports other than textiles and
apparel. Because of the inter-relationship between CAFTA-DR garment
production and the inter-related requirement for the use of U.S.
fabrics and other inputs, an econometric model would not yield
meaningful results. The NAM's estimates of manufactured goods export
gain are thus net of the textiles and apparel sector.
It should be noted, however, that the U.S International Trade
Commission's (USITC) analysis indicated the agreement would boost U.S.
textile and apparel exports by $700 million, and U.S. textile and
apparel imports by $680 million--essentially expecting a neutral effect
on these industries.
The NAM analysis takes consideration of the substitutability of
U.S. exports that might displace existing domestic production in the
CAFTA-DR countries, and U.S. exports that would displace third-country
exports to the region. An examination of the industrial production
structure of CAFTA-DR manufacturing industry and the composition of
U.S. exports showed very little overlap or substitutability. The vast
bulk of U.S exports to the region are products that are not made in the
CAFTA-DR region.
There is, however, a high degree of similarity in the composition
of U.S. exports to CAFTA-DR and other country exports to the region,
and this is where almost all of the tariff effect will take place on
U.S. exports. U.S. exports to the region will become duty-free, while
exports from the European Union, Canada, Japan, and other countries
will continue to be subject to the full duties of the CAFTA-DR
countries. This will make U.S. products more price-competitive relative
to third-country production and will result in a shift of CAFTA-DR
purchases from the other suppliers to U.S. products.
The results of the NAM tariff effects model are shown in Table 3,
below. The elimination of tariffs on U.S. exports of manufactured goods
(leaving aside textiles and apparel, as explained above, is estimated
to generate over $1 billion in additional U.S. manufactured goods
exports. Miscellaneous manufactures, electrical equipment, chemicals
and allied products, and paper products would be the largest dollar
gainers.
Table 3
U.S. Export Gains from CAFTA-DR Tariff Elimination
Millions of Dollars
----------------------------------------------------------------------------------------------------------------
Gain from
U.S. Applied tariff Percentage
Exports, $ CAFTA-DR elimination, Gain, %
Millions tariff, % $ millions
----------------------------------------------------------------------------------------------------------------
Paper and wood products.................................... 757 10 141 19
Tires and other rubber products............................ 212 10 43 20
Metals..................................................... 247 6 40 16
Chemicals, including photography supplies.................. 1,431 5 159 11
Motor vehicle and parts.................................... 449 11 112 25
Transportation & Equipment................................. 182 4 13 7
Non-electric machinery..................................... 1,281 4 104 8
Electric Machinery......................................... 2,597 4 176 7
Mineral Products........................................... 980 4 60 6
Manufactured articles not specified elsewhere.............. 1,248 7 203 16
----------------------------------------------------------------------------------------------------------------
Total, excluding textile and apparel....................... 9,382 1,051 11
----------------------------------------------------------------------------------------------------------------
See Methodology section for sources and other information.
These exports would not displace local production in the CAFTA-DR
countries, but would instead displace imports into the region from
producers in countries that would still be subject to the full import
duties assessed by the CAFTA-DR countries. The model's estimates are
for export gains after all tariffs are eliminated. As not all CAFTA-DR
tariffs on manufactured goods would be eliminated immediately, the
above estimates are not a first-year result. Additionally, it is
important to note that these estimates are incremental to the base of
U.S. exports--i.e., the model is not estimating an absolute level of
exports, but instead is estimating how much larger exports would be
with the tariff cuts than without them. The overall level of U.S.
exports, of course, depends on many factors, particularly the health of
the CAFTA-DR economies.
BOUND VS. APPLIED RATES
A very important aspect of the agreement has been widely overlooked
by most observers--the fact that the official tariff bindings--so-
called ``bound tariff rates'' of the CAFTA-DR countries are much higher
than the statutory tariff rates they actually apply. This is not
uncommon for developing countries, many of whom have unilaterally
reduced the tariff rates they actually charge, while keeping their
bound rates at high levels.
Table 4
CAFTA-DR: Bound Tariff Rates
------------------------------------------------------------------------
Bound
Tariff Rate
------------------------------------------------------------------------
Costa Rica................................................. 44%
Dominican Republic......................................... 35%
El Salvador................................................ 35%
Guatemala.................................................. 41%
Honduras................................................... 32%
Nicaragua.................................................. 41%
------------------------------------------------------------------------
Source: World Trade Organization. Bound tariff data are unweighted
averages.
The significance of this is a country may legally, under WTO rules,
charge any tariff rate it wishes, so long as it does not exceed its
bound rate. Thus, if any of the CAFTA-DR countries wished, they could
raise their tariffs up to the extremely high levels that are summarized
in Table 4. As these are averages, some bound rates will be even
higher. For example, CAFTA-DR bound tariffs can be as high 50 percent
on transportation equipment. Without the CAFTA-DR agreement, U.S.
exporters would have no recourse against countries' raising their
applied tariffs. The CAFTA-DR agreement, however, would commit these
countries to maintain zero duties on U.S. products even if they hiked
their applied tariff rates up to their bound tariff levels.
In such a case, other exporters to the CAFTA-DR countries would
have to pay the higher tariffs, while U.S. exporters continued to have
duty-free access. This guarantee is of substantial value. U.S. bound
and applied rates are virtually identical, as is typically the case for
industrial countries, so there is no U.S. obligation here.
NON-TARIFF EFFECTS
The second effect on U.S. exports stems from liberalization of non-
tariff barriers and improvements in trade-facilitating rules and
policies. These include express delivery, customs clearance,
intellectual property protection gains, etc. For example, the agreement
requires that customs processing be accelerated and imported goods be
able to clear customs within 48 hours to the extent possible. Advance
customs rulings, transparent publication of customs rules, and other
trade facilitation steps will lower the cost of processing exports.
The technical barriers to trade provisions are expected to reduce
arbitrary rulings on standards. The agreement increases the likelihood
that U.S. standards and conformity assessment procedures will be more
broadly accepted, which will reduce costs in the chemicals, machinery,
and other areas. Smaller U.S. exporters will benefit
disproportionately. Additionally, the agreement improves the ability of
U.S. exporters to switch distributorships, which is presently difficult
to do in some of the countries.
These improvements will result in expanded exports, but there is no
economic model to estimate the amount of the gain. After consultation
with knowledgeable NAM members, we believe these gains may be
equivalent to a further 5 percent reduction in the total cost of
providing exports into the CAFTA-DR markets. While the effects are
real, and in some instances may rival the size of the tariff effects,
there is no reliable way of quantifying the non-tariff benefits.
EXPORT PRESERVATION
By far the largest effect on U.S. exports would be the preservation
of some or all of existing U.S. exports to the CAFTA-DR countries that
otherwise would be lost if Asian countries displaced current CAFTA-DR
country apparel exports to the United States. This effect could be as
large as $4 billion of U.S. exports.
As the CAFTA-DR countries do not have large currency reserves or
borrowing capacity, the amount they can buy from the United States and
other countries depends on how much foreign currency they can earn.
The region has four significant sources of foreign exchange--
exports of goods, remittances from workers who have migrated to the
United States, tourism earnings, and investment inflows. If CAFTA-DR
country exports of apparel to the United States were to be displaced by
Asian-made apparel, none of the other three sources would automatically
increase to make up for the loss of export earnings.
Thus, for every dollar of apparel exports the CAFTA-DR countries
lose to Asian competitors, they will have to cut their imports by a
dollar. If they were to lose all $10 billion of apparel exports they
currently sell to the United States, they would have to cut their
global imports by $10 billion. Since over 40 percent of what they
import comes from the United States, it is obvious this is a matter of
some consequence to U.S. exports.
Most observers believe that in the absence of the CAFTA-DR
agreement, the region risks losing all or most of its apparel industry.
The cause of this loss is the January 1, 2005, expiration of the global
textile quotas that had been permitted by World Trade Organization
(WTO) rules. Analyses by the International Monetary Fund, the World
Bank, and others indicate China's costs are lower than all other
producers and in the absence of quota restraint would be able to put
most producers, including those in the CAFTA-DR region out of business.
Even analyses performed by such anti-trade agreement organizations as
the Global Trade Watch state that without the CAFTA-DR agreement, the
region's apparel production cannot survive.
The U.S. International Trade Commission's (USITC) analysis of the
CAFTA-DR agreement indicates that implementation of the CAFTA-DR
agreement will provide enough added advantages to enable the region's
producers to maintain their exports to the United States and avoid the
loss of its industry. The USITC does not foresee a significant net
increase in imports into the United States resulting from the CAFTA-DR
agreement, and states that any increase in the region's exports to the
U.S. market likely would be in lieu of other imports into the United
States. In fact, as noted earlier, the USITC analysis sees a small ($20
million) positive net export effect in this sector.
Thus, if without the benefit of the CAFTA-DR agreement'
preferences, CAFTA-DR producers were unable to compete with Chinese
producers and lost their entire U.S. market, their exports to the
United States would fall by $10 billion. As earlier noted, the United
States has more than a 40 percent share of their imports, so our
exports to them would be expected to fall by about $4 billion.
There would not be an offsetting increase in U.S. exports to China.
This is because while the CAFTA-DR nations spend virtually everything
they earn, China does not. Rather than utilizing its U.S. dollar
earnings to purchase U.S. goods or services, China instead uses them to
build up its foreign currency reserves to keep its currency undervalued
and implement its export-led growth policy. In 2004, for example, China
added to its currency reserves by $200 billion, even while it earned a
$162 billion merchandise trade surplus with the United States. China
now has currency reserves of $600 billion, 40 percent of its entire
annual production of goods and services.
The NAM's calculations for the relationship between exports and
U.S. employment indicate that currently about 12,000 jobs are
associated with every $1 billion of exports, as was noted earlier--
meaning that if there were a $4 billion drop in U.S. exports, about
48,000 U.S. job opportunities would be eliminated. Many would probably
be in the U.S. textile industry, since the CAFTA-DR region is one of
the only large purchasers of U.S. textiles--which they must use to
obtain most of their tariff preference privileges. Losses, however,
would also occur in other sectors as well.
It should be stressed that the NAM is not making any forecast of
its own with respect to the degree to which the CAFTA-DR countries can
preserve their sales to the United States under the CAFTA-DR agreement.
For purposes of the analysis, the NAM relied on the USITC's estimates
of the effect of the agreement on the region's garment industry. The
NAM also accepts, at the other end, the widely-held view that without
the agreement, their apparel industry has little, if any, hope for
survival.
Thus the maximum effect on preserving U.S. exports is calculated by
the difference between the CAFTA-DR producers being able to keep their
present $10 billion in annual apparel exports to the United States or
entirely losing their markets to Asian--and particularly Chinese--
producers. Certainly the CAFTA-DR agreement is the best hope for the
region's producers. If, however, the agreement were not sufficient to
enable them to maintain their sales, then of course, the figures for
the preservation of U.S. exports would be proportionately smaller. For
example, if only half their sales were preserved, then the differential
effect on U.S. exports would be half the maximum depicted in this
paper.
ECONOMIC EFFECTS ON CAFTA-DR COUNTRIES OF LOSING APPAREL EXPORTS
As part of the analysis, the NAM considered some of the domestic
economic effects in the CAFTA-DR region if they were to lose their
apparel industry to China or other Asian nations. Even a cursory look
shows that the effects on their economies would be severe.
The NAM's analysis shows that there are about 550,000 people
working in Central America's apparel industries. Were the industry to
see its exports to the United States displaced by Asian producers,
most--if not all--of these jobs, which are among the highest-paying in
the region, would disappear. As shown in Table 5, the job losses would
raise the overall official unemployment rate in the region to 17
percent.
The actual job losses would be higher if the apparel industry
disappeared, for support jobs in other industries--e.g., transportation
services--would disappear as well. Additional jobs would be lost in the
service and other industries as the former apparel workers no longer
had income with which to purchase goods and services. The NAM has no
estimate for the size of this ``multiplier'' effect in the CAFTA-DR
countries, but by way of order of magnitude, if the multiplier were the
same as in the United States, an additional 275 thousand workers would
become unemployed, increasing the region's unemployment by over 800,000
and implying an unemployment rate of 18 percent.
Table 5
CAFTA-DR Unemployment, Assuming Loss of Textile/Apparel Industry
----------------------------------------------------------------------------------------------------------------
Textile/
Current Unemployment Apparel Prospective Prospective
Unemployment, Rate % Employment Unemployment, Unemployment,
thousands thousands thousands Rate, %
----------------------------------------------------------------------------------------------------------------
CAFTA-DR................................ 2,063 14 549 2,612 17
Costa Rica.............................. 118 7 45 163 9
Dominican Republic...................... 404 17 138 541.5 22
El Salvador............................. 170 7 91 261 10
Guatemala............................... 288 8 122 410 11
Honduras................................ 663 28 107 770 32
Nicaragua............................... 420 22 46 466 24
----------------------------------------------------------------------------------------------------------------
Source: Overall employment data from CIA World Factbook, for 2003. Textile/apparel employment data are latest
available, from USITC country studies.
Moreover, CAFTA-DR's apparel exports account for a surprisingly
large portion of the region's entire Gross Domestic Product (GDP).
Their net exports of apparel to the United States of about $5.5 billion
are equivalent to 7 percent of their combined $77 billion GDP--the sum
total value of all goods and services produced in the region.
A 7 percent drop in GDP would put the region into a serious
recession. Such a decline would be two and a half times as large as the
deepest recession the United States has had in the last 50 years
(1982's 2.6 percent drop). The political stability consequences in the
CAFTA-DR countries of having 550 thousand or more people become
unemployed and enduring a 7 percent decline in GDP with little prospect
of recovery are self-evident.
Table 6
CAFTA-DR Gross Domestic Product, 2003
(Billions of U.S. Dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total...................................................... $77
Costa Rica................................................. $18
Dominican Republic......................................... $16
El Salvador................................................ $13
Guatemala.................................................. $20
Honduras................................................... $7
Nicaragua.................................................. $4
------------------------------------------------------------------------
Source: International Monetary Fund.
The CAFTA-DR countries are already highly dependent on remittances.
For example, in El Salvador remittances are 15% of its GDP. An Inter-
American Dialogue report found that the CAFTA-DR countries received $9
billion in remittances in 2003. While this counter-cyclical flow would
surely rise in the event of massive layoffs in the CAFTA-DR region, the
present numbers indicate that migrants are already hard-pressed and
increases are likely to be small.
EFFECT ON U.S. IMPORTS
Turning to U.S. imports, the analysis indicates the CAFTA-DR
agreement is unlikely to generate significant new imports to the United
States. The primary reason for this assessment is that the CAFTA-DR
countries have been enjoying preferential access to the U.S. market
under a variety of special programs such as the Caribbean Basin Trade
Partnership Act (CBTPA).
Fully 80 percent of their exports to the United States already
enter duty-free under these programs. Moreover, outside the textiles
and apparel industries, 95 percent of CAFTA-DR exports already enter
the U.S. market duty-free. Thus they will obtain little new U.S. market
access. The key benefits to the region lies in the greater ability to
withstand Chinese and other Asian nation competition in the apparel
area, and the fact that their access to the U.S. market will be
permanent and not dependent upon possible changes in U.S. legislation
or policies.
Table 7
Proportion of U.S. Imports from CAFTA-DR Currently Entering Duty-Free
(Percent)
------------------------------------------------------------------------
------------------------------------------------------------------------
All Imports................................................ 80
Manufactured Goods......................................... 77
Textiles and Apparel....................................... 68
Other manufactured goods................................... 95
------------------------------------------------------------------------
Source: United States International Trade Commission.
Certainly the improved investment rules, better rule of law,
greater protection of intellectual property, better-functioning
services markets, and other structural improvements that the countries
will make under the agreement are likely to improve their business and
labor climate and have a positive effect on U.S. and other investment
in Central America.
However, fears that a flood of U.S. investment will pour into the
CAFTA-DR region and ``outsource'' U.S. jobs are unfounded. First, it is
important to understand that at the present time there are no
restrictions on U.S. investment into the region. American companies
have been free to invest.
Second, three of the countries already have Bilateral Investment
Treaties (BITs) with the United States that provide U.S. investors with
substantially the same benefits as the FTA would.
Third, it is important to understand just how small the CAFTA-DR
economies are. Together their production of goods and services (total
GDP) is only $77 billion. This is a tiny fraction of U.S. production.
To be precise, their combined GDP is seven-tenths of one percent (0.7
percent) of U.S. GDP or the size of Sacramento, California. Even
investments significant to their economies would be small in scale to
present trade flows.
Finally, any increased investment in the CAFTA-DR region is most
likely to be in product areas that would otherwise see imports into the
United States from Chinese or Asian production--rather than displacing
U.S. production. As noted earlier in this analysis, U.S. imports from
the CAFTA-DR region would result in greater U.S. exports than if the
production were in Asia.
Thank you again Mr. Chairman and Members of the Subcommittee. I
appreciate the opportunity to express my views, and those of the
National Association of Manufacturers about the importance of CAFTA-DR.
Mr. Stearns. I thank the gentleman. I will start with my
questions first. Mr. Kearns, you have made quite a bit about
the deficit in our trade, but isn't it also true that deficit
relative to GDP is really what you should be talking about?
Because if you compared deficits 20 years ago with deficits
today, you have a much bigger GDP. So it is all relative to
what you are doing in business. Wouldn't you admit that that is
a factor? This is just a minor point. It is just----
Mr. Kearns. Yes, it----
Mr. Stearns. [continuing] because I think every Member of
Congress struggles, what do deficits mean? Not just for the
budget but also for trade. And, you know, so I think your
emphasis on these deficits, as Mr. Vargo has pointed out, is
not in the area where we are talking about, but it is European
Union where we are probably buying all their BMWs and buying
all their Porches and Mercedes and so forth, so, you know, it
is just a thought.
Mr. Kearns. Well, I think the trade deficits are--Mr. Vargo
has said that trade agreements are the way to solve these
problems, but the point I am making is that they are not
working to solve those problems because the trade deficits
would be dropping, regardless of their share of GDP. If in fact
these trade agreements were effective in opening foreign
markets full to U.S. products, we would exporting a lot more
and importing a lot less----
Mr. Stearns. Okay.
Mr. Kearns. [continuing] and in fact trade is a--the rest
of the world approaches trade as a zero sum game, get your
products into the U.S. market, keep out U.S. products to the
extent you can. So it hasn't been a win-win solution, and it is
a symptom of a larger problem. And the trade agreements are
clearly ineffective in getting a greater balance in trade.
Mr. Stearns. The United States International Trade
Commission did a study. They estimate that under CAFTA, imports
from the area would go up about 12 percent, $2.8 billion, while
exports would go down roughly 15 percent, $2.7 billion. Does
your organization dispute those numbers? Because it looks like
a wash to me.
Mr. Kearns. Yes, essentially, it is a wash. The point is--
--
Mr. Stearns. Do you dispute those numbers? Do you accept
those numbers?
Mr. Kearns. I just said it is a wash, sir.
Mr. Stearns. Okay. Okay.
Mr. Kearns. I agree.
Mr. Stearns. Okay. Okay. Ms. Lee, you know, just as a
person when looking at this, not knowing about the agreement,
and Ms. Vargo said right now the tariffs are set up so that
they can send everything into us with no tariffs, but we can't
send it to them. So just you would say by golly, any kind of an
agreement that would allow you to get into their markets with
no tariff has got to be good just on that basis. And then, as
Mr. Vargo said, we thrown in some labor agreements and we make
particular set-ups for maybe the controversial items, it seems
on the outset that this agreement would be better than no
agreement, because right now they come in here free of charge
and we can't get into theirs. So what is wrong with trying to
set up some kind of agreement where we can get into theirs?
Ms. Lee. No, I think the idea of getting extra market
access is always appealing. The question is, first of all, as
Mr. Vargo said, this is a very small market. And so getting
addition, incremental, a few percentage points different in the
tariff you pay in a very small market is not going to be
economically all that meaningful for the United States. And if
the conditions attached to it are inadequate and wrong, and I
guess I would argue--I completely disagree with Mr. Vargo and
Mr. Cohen about whether the labor rights provisions are a step
forward. We see them, and we are the ones who live with these--
--
Mr. Stearns. You think they are a step backward?
Ms. Lee. We think they are a definite step backwards.
Mr. Stearns. Separate the labor conditions----
Ms. Lee. Yes.
Mr. Stearns. [continuing] and I know it is going to be hard
since you represent the AFL-CIO, but wouldn't you agree that
this agreement would help us sell to Central America?
Ms. Lee. Not to a large extent. I mean, I think there is
probably some small increase in sales to Central America, but,
and I think this is really the issue that Mr. Kearns was
getting at also, that to the extent that American companies
don't have an export strategy from the United States for the
large part, that they have an outsourcing strategy, that they
have been serving foreign markets by moving production there,
and they are serving the U.S. market by moving production
offshore, taking advantage of low-paid labor and workers who
lack basic rights, who don't have the right to organize unions.
So to the extent that these trade agreements are much more
about facilitating the mobility of capital than they are about
facilitating mobility of goods. It ends up in the end--even
though--that was very true of NAFTA. The figures were that U.S.
goods faced about a 10-percent tariff going into Mexico, and
Mexican goods faced only a 2.5-percent tariff coming into the
United States. So you would think that if you take those
tariffs down to zero that U.S. producers would be the winners.
But it is not as simple as looking at the tariffs. And that is
the point that we are trying to make in the Central American
context. And the investment rules, the intellectual property
rights rules, the government procurement rules, and the
services rules are also problematic in our view. So the set of
rules together don't justify the small additional market
access.
And just one word on the ITC studies is that those studies
were wrong in the case of NAFTA.
Mr. Stearns. So you don't agree with Mr. Kearns?
Ms. Lee. I don't.
Mr. Stearns. He said it is a wash. You say that the study
was wrong.
Ms. Lee. I don't believe that CAFTA is going to be
economically devastating to the United States. It is small.
Mr. Stearns. I mean, obviously, as Mr. Cohen said or Mr.
Vargo, this is Sacramento. So, I mean----
Ms. Lee. It is not economically devastating, but it is also
not going to be our savior. It is not going to create----
Mr. Stearns. No, but it might be symbolic. It might be
geopolitical and----
Ms. Lee. It is----
Mr. Stearns. [continuing] and also I understand there is a
lot of U.S. industry unionized support for this agreement. I
mean, you hear the folks from Michigan talking about over a 10-
year period they will be able to sell more cars at really----
Ms. Lee. There is not a lot of U.S. unionized support for
CAFTA. Certainly, the United Auto Workers, the steel workers,
the machinists, the apparel workers, we have got a fair amount
of unanimity within the U.S. labor movement opposed to CAFTA.
Mr. Stearns. Okay, Mr. Vargo, is there anything that Ms.
Lee said that you would like to respond to. I am trying to----
Mr. Frank Vargo. Well----
Mr. Stearns. [continuing] understand this in a very
simplified way.
Mr. Frank Vargo. Yes, that has become very popular now to
say these are----
Mr. Stearns. I think you have to turn your mike on I think.
Mr. Frank Vargo. It has been very popular these days to say
these are outsourcing agreements. They are not outsourcing
agreements. There is nothing that has prevented any American
company from investing in Central America. Half the countries
already have bilateral investment treaties with us. This is
about lowering their tariff rates. Why would the NAM care about
lowering tariff rates if we just wanted to outsource? One quick
point on NAFTA; we lost three million manufacturing jobs
between 2000 and 2003. Three million. Do you know how much our
imports from Mexico of manufactured goods rose in those 3
years, Mr. Chairman? Zero. They fell. These are not outsourcing
agreements. Now, sure, some plants move to Mexico. Others
expanded and exported to Mexico.
We want this agreement because we want those barriers down
because we want to sell to them.
Mr. Stearns. My time has expired. Ms. Schakowsky.
Ms. Schakowsky. Well, Mr. Vargo, I feel that I have been
called a bad neighbor. I feel that I have been called a
chicken, afraid of negotiating agreements with these little
countries. You said that the sugar industry should say a big
thank you for what they have gotten in this and that it is good
for us and good for them. And my real question is who is the
``us''? You know, I have no problem with you coming here and
arguing a case for the National Association of Manufacturers.
But I do have to say that I take exception for your arguing on
behalf of the workers in this country or in those countries. We
have other people who are here to presumably argue their own
self-interests. And I would hope that you presume that they
understand their self-interests.
And I would say that to Mr. Cohen too. If you want to argue
on behalf of your members, that, it seems to me, is what this
is for. But for you to come and tell us about why organized
labor, why working people are wrong about what they believe to
be their own self-interest is something else. And I would agree
that some of your members may benefit very much. Your bottom
line may be better and you may argue that ultimately, that is
good for the United States of America.
I, for one, am concerned about the workers in my district,
and I am also concerned, having traveled to Ciudad Juarez and
seen workers living in the packing crates of the items that
they are manufacturing when their employer is a U.S. company
that crossed the border. I am worried about the impact that our
trade agreements are having. On this side of the border, the
lost jobs, and on the other side of the border. And I, for one,
am less concerned about the bottom line of your members. That
is a legitimate concern. But it is not my primary concern.
So I wanted to go back to Ms. Lee to talk a little bit
about the situation with these labor agreements. But I also
wanted you to defend--I think Mr. Vargo made a strong argument
in saying this is not an outsourcing piece of legislation or
agreement, but rather--so if you would talk about both the
labor agreements. But also first to address it. That it is not
outsourcing, that in fact we are talking about the interest of
lowering the trade barriers.
Ms. Lee. Thank you very much, Congresswoman. And in terms
of the outsourcing agreement, I guess there are some key
differences, key things that changed. Certainly, the investment
protections are things that I know multinational corporations
do look at whether--if you are reducing the riskiness of moving
production to another country, and you are locking in the lower
tariff barriers, that does make it more attractive to move the
production there. You have guaranteed your access back into the
United States market and maybe even guaranteed the lower
tariffs on your inputs that move back and forth.
In terms of whether these agreements are outsourcing or
not, I think that--I will say two things in terms of NAFTA,
first of all, that a couple of years after NAFTA there was a
follow-up and went back to a lot of the companies that argued
for NAFTA--Allied Signal, Procter and Gamble, Eastman Kodak--
and asked them how many jobs did you create in the United
States through your increased exports to Mexico and Canada? And
those companies were almost to the one unable to come up with
very many jobs, five here, six there, small numbers. On the
other hand, almost all of those companies had in fact moved
production to Mexico in the years following NAFTA's
implementation.
The same thing was very true around the China PNTR.
Remember, that debate also was about opening China's market,
making sure that American producers and workers had a good
chance to sell more stuff to China, and yet again, when a
``Wall Street Journal'' reporter went to as many multinational
corporations as she could around the China vote and said how
many of you are actually planning to expand exports to China if
PNTR goes through? She couldn't find a single one that would
say they wanted to export more to China. And yet every single
one again had plans to move production to China.
So this has been our experience of the American labor
movement that the trade agreements are sold as market opening
agreements. And in fact what we see is that they are used both
at the bargaining table, when workers are trying to form
unions, when they are trying to bargain for decent wages and
benefits and they are told we can move to another country where
workers don't have the right to form unions, where wages are
much lower, where we don't have to worry about pesky workplace
health and safety regulations, the enforcement of environmental
rules. And that is exactly what our members experience every
single day of the week with respect to trade agreements. And
that is why our folks are cynical and they don't believe the
promises that have been made on behalf of the trade agreements,
because they simply have not seen them borne out in their own
lives, in their own workplaces, in their own communities.
Mr. Kearns. May I make one additional point on outsourcing
or is that out of order?
Mr. Rogers. Please.
Mr. Kearns. Okay. Many of our members at U.S. Business and
Industry Council are suppliers of intermediate goods to larger
American corporations, multinational corporations. And I can
tell you there is extreme pressure to move to--has been extreme
pressure over the last 12 years to move to Mexico, to follow
the majors if you are in the auto parts business or supplying
parts for major appliances, for instance. The GM plant in
Shanghai, the Buick plant there, one of our members bid on a
contract and he was told well, you won the bid, you are the low
man, but you have to take a Chinese partner, and over 5 years
you have to transfer all of your technology to them. Well, at
the end of 5 years, guess who is going to be supplying that
plant. And it is not going to be from Tennessee. It is going to
be from some local Chinese supplier. So I would dispute Mr.
Vargo's assertion that these are not outsourcing agreements.
If you looked at PNTR for China, we did a survey of the
websites, the top 50 Fortune 500, the ones that are involved in
manufacturing, they all had plans to move factories to China,
not to sell goods out of U.S. factories to China. And when they
moved those factories to China, the whole supply chain in this
country is disrupted, and the American companies supplying them
either have to follow them or are forced to transfer technology
to a Chinese partner, a joint venture partner, et cetera. Thank
you.
Mr. Cohen. Mr. Chairman, may I just make one comment?
Mr. Rogers. Please.
Mr. Cohen. Simply on this larger issue of companies'
involvement overseas, we have done quite a few investigations,
as well, of what the consequence is of investment overseas by
U.S. companies. And there is a conclusion that has come out
again and again, and the conclusion is that as companies invest
more and more overseas, they have a greater level of activities
here at home. Were they to have less activity overseas, invest
less, they would have fewer activities here at home. And in
that sense it is not a substitution. It is complementary. And
when you actually look at what companies produce overseas, the
lion's share of what is produced overseas is sold overseas.
Similarly, if you look at where U.S. companies export their
products and they produce them in the United States, the
largest single purchaser of U.S. product that is produced here
in the United States are the subsidiaries and affiliates
overseas of U.S. companies.
Mr. Rogers [presiding]. And not because I am sitting in the
chair but apparently I am next on the list, a couple of quick
things, Mr. Kearns. China is not covered in the NAFTA
agreement, correct? I mean, the example used was Shanghai. You
mentioned Mexico and China in the same breath. I mean, just for
the sense of clarity, we don't have a free trade agreement with
China.
Mr. Kearns. No, they are part of the world----
Mr. Rogers. I just wanted to make that very, very clear.
Mr. Kearns. There is not a bilateral free trade agreement
with China, correct.
Mr. Rogers. And I have the same concerns, being from
Michigan, about coercion of placement of supply--absolutely,
but we need to be very clear about this, that we have no free
trade agreement with China, which is a very common
misconception, at least where I come from. NAFTA and China, in
my estimation, are two very distinct sets of problems that we
need to address just for a point of clarification.
Mr. Vargo, you cited an interesting figure that I think is
important. Two-thirds of all your manufacturing growth came
from exports. Did I understand that correctly?
Mr. Frank Vargo. I must have misspoken, Mr. Rogers. What I
meant to say was that two-thirds of our entire growth of
manufactured exports to the whole world since 1997 has come
from NAFTA.
Mr. Rogers. That is interesting.
Mr. Frank Vargo. And----
Mr. Rogers. You mean exported to NAFTA co-signatures, is
that correct?
Mr. Frank Vargo. To purchasers in NAFTA.
Mr. Rogers. Okay.
Mr. Frank Vargo. Two-thirds of our entire--well, one-third
to Mexico. In fact the increase to Mexico was almost as large
as to all of the countries with which we don't have trade
agreements.
Mr. Rogers. Can you put that in a--that has a huge job
implication, does it not?
Mr. Frank Vargo. Yes, it does.
Mr. Rogers. I mean, one-third of all--this sounds kind of
complicated, but what does that mean in actual jobs? Can you
give me an understanding?
Mr. Frank Vargo. Our exports of manufacturers to Mexico are
currently running over $100 billion. I mean, you can figure
12,000 jobs per billion. So there is a lot there. But can I
make one point on Mexico----
Mr. Rogers. Sure, please.
Mr. Frank Vargo. [continuing] which NAFTA has been impugned
a lot, and it was said, you know, if these things worked, our
trade deficit would fall. You know, anyone who would like to
check the figures can see that our manufactured goods trade
deficit with Mexico last year in 2004 was smaller than it was
in 2002 while it exploded with the rest of the world. Two-
thirds of our deficit is with Asia. And, Mr. Rogers, I know how
concerned you are about the Chinese currency. That is where our
problem is.
Another problem I have with people going on NAFTA, NAFTA,
is they are barking up the wrong tree and they are preventing
us from getting to the real problem, which is, within the
system, we have got to find a way to solve those Asian currency
problems, or our deficit is just going to get totally out of
hand. It is plenty big enough now. Thank you.
Mr. Rogers. And I agree 100 percent on this currency
manipulation. It is a huge problem that we must----
Mr. Frank Vargo. It is.
Mr. Rogers. [continuing] address. It is one of the areas
that we are wholly uncompetitive on American manufacturers. It
has nothing to do with any trade agreement other than it is bad
economic policy.
Mr. Frank Vargo. I don't know if you can find jurisdiction,
this subcommittee, but I would love to have a hearing on it.
Mr. Rogers. We are working on it. Trust me on that one. And
now that I am sitting in the chair, can I make that pledge
right now? Also, I think it is important to point out--and I
don't know the exact number--I want to say two-thirds. That may
be wrong. You can help me here. One of the things with global
competition, American manufacturers got more innovative and
more productive. Didn't we lose about two-thirds of those jobs
through productivity increases and not necessarily moving
companies offshore?
Mr. Frank Vargo. Probably not that high, but a lot. Our
productivity growth has been astonishing. But as far as trade
goes, you know, we had a worsening of about $100 billion in our
trade deficit in those 3 years. But about $80 billion of that
worsening was because our exports fell. And our exports fell
because the dollar was allowed to get out of line. So we take
the export fall and you take the productivity and the decline
of the domestic economy, you have got the vast bulk of it.
Mr. Rogers. Talk to me about enforcement. I know that the
National Association also has some concerns about enforcement.
Mr. Frank Vargo. Yes, sir, we----
Mr. Rogers. What do you think that we can do on the
enforcement side, either in Congress or through the
administration to make sure that these are truly fair and free
trade agreements?
Mr. Frank Vargo. Two things in my view--and for full
disclosure I will say that I had 30 years at the Commerce
Department, and part of my time there was in setting up a
compliance center at the Commerce Department--I would like to
say three things actually. One, I would like to see a strong
inter-agency committee on enforcement and compliance so the
agencies would all really get in line to work together. Second,
I would like to see some more enforcement resources, but third,
I would like to see investigatory resources because we have so
many smaller companies that say I go to the government; they
say well, prove it. Well, I can't go to China and document
everything. There is no way I can do that. So, in essence, a
lot of smaller companies are left outside the system. So I
would hope that we would look at how can we increase the
resources that go to investigation. Commerce has set up one
unit. We haven't seen that much out of it yet. We would like to
press for more.
Mr. Rogers. I think those are great suggestions, and I
think, hopefully, we can work together and find some common
ground on that on both sides of the aisle on that particular
issue. I see that my time is up, and I would now recognize Mr.
Brown.
Mr. Brown. Thank you, Mr. Chairman. Mr. Vargo talked about
the expansion of all the exports from the United States to
Mexico, understanding mostly though the great--overwhelming
percent of those exports were either equipment to build
factories in Mexico or what some have called industrial
tourists. They are components that go to Mexico and then return
quickly to the United States as assembled products.
And I would just show this chart here that none of these
countries in Central America, just like Mexico is not buying
consumer goods. None of these countries can afford to buy a car
from Mr. Rogers' district, can afford to buy steel from West
Virginia, can afford to buy textiles, by and large, from North
and South Carolina and Georgia, can afford to buy from Seattle,
buy any kind of software. I mean, it is just pretty clear that
these are not countries that are going to be able to consume,
to buy American exports as Mr. Kearns was saying.
Another point before I have a question for you, Mr. Kearns.
You had said that--I have heard President Bush the first say
that $1 billion in imports or exports translates into 18,000
jobs. Your number was 12,000. Either way you were talking about
how this means more jobs for the United States. Conversely,
when you have a $600 billion trade deficit, if you multiply
that times 12,000 jobs, because if you are going to multiply it
one way, you are going to multiply it the other way--I can't
even add that high, but 12,000----
Mr. Kearns. It is eight million. It is----
Mr. Brown. It is obviously an awful lot of job loss, and so
I think you made that point pretty well. Mr. Kearns, I have a
yes or no question for you because of the shortness of time.
The only penalties we talked about earlier Ms. Schakowsky first
brought up for violating CAFTA's labor and environmental
provisions is a fine capped at $15 million. In contrast,
violations of CAFTA's commercial provisions result in unlimited
trade sanctions, a much more drastic and effective tool. My yes
or no question for you is penalties for violations of the
commercial and IP provisions of CAFTA were the same as those
for labor and environment provisions, capped at $15 million
fines, would NAM still support CAFTA?
Mr. Frank Vargo. I am sorry. What was the question?
Mr. Brown. The question was that if the penalties for
violations of commercial and IP--if the penalties for those
provisions were the same as those for labor and environmental
provisions, that is, capped at $15 million rather than trade
sanctions, would NAM still support CAFTA?
Mr. Frank Vargo. Well, I think that the sanctions should be
appropriate to the----
Mr. Brown. Would you give me a yes or no on that? Is that
possible?
Mr. Frank Vargo. It is not possible.
Mr. Brown. Okay. All right, then. I have a couple of
questions for Ms. Lee. Several of CAFTA's supporters cite the
report from the International Labor Organization on Central
American labor laws and enforcements. When I hear some of the
supporters of CAFTA toasting an ILO report, it piques my
curiosity for sure. People keep saying the report says CAFTA
countries' labor laws meet ILO standards. Would you both
discuss that whether in fact they do. And second question,
would you comment on Mr. Cohen's comments--and I believe Mr.
Vargo weighed in too--on the whole issue of these labor
provisions in CAFTA being actually stronger than labor
provisions in the Jordan agreement? Thank you.
Ms. Lee. Thank you very much. We read that ILO report
pretty closely, and it is written like all ILO reports, in very
careful language. But it found about 27 different ways in which
Central America's labor laws do not in fact meet ILO standards.
Now we can argue about whether those are important ways or not
important ways, but I think it is not accurate to say Central
America's laws meet ILO standards. They don't, and in fact
those 27 different deficiencies in Central America's labor laws
haven't been corrected. And there is no move to correct them.
And if CAFTA is passed there will be no incentive to correct
them.
And, you know, we talk every day with Central American
trade unionists, and they tell us the deficiencies in their
labor laws are real.
There are also problems with enforcement. Those are both
issues there. But the deficiencies in the labor laws create
loopholes where workers who try to organize unions simply can't
register their unions, they get fired, and there are no
penalties. There are no adequate penalties. Those are things
that need to be fixed in Central America's labor laws. And the
kind of vague language written into constitutions that say we
support labor rights is almost irrelevant in that context.
The CAFTA doesn't just clarify the Jordan standard. The
Jordan standard has three labor provisions: to respect and
affirm the ILO obligations under the Declaration of Fundamental
Principles and Rights at work, to enforce your own laws, and
not to derogate from your laws in order to increase trade. And
CAFTA explicitly makes the first and the third of those, the
commitment to meet ILO standards and the commitment not to
derogate not subject to any enforcement whatsoever. That is not
a clarification.
Under the Jordan agreement it is possible to bring dispute
settlement over whether a country is in fact meeting ILO
standards, whether their laws meet ILO standards or not. It
might be that it would be unlikely that that would happen, and
I would argue that it is unlikely, that, you know, if a madman
takes over the country and bans union, we would be able to
bring a dispute settlement case saying that that country was
not in fact striving to ensure that its laws met ILO standards.
It was not in compliance with that.
And in terms of the different dispute settlement
mechanisms, I was astounded to hear Ms. Vargo say that the GSP
provisions are a sledgehammer, and she much prefers the weak
CAFTA labor enforcement provisions where there is essentially
the ability to pay a fine to yourself is what the CAFTA labor
rights enforcement provisions include. And only if you don't
pay that fine to yourself does a trade sanction come into play.
Now, trade sanctions, the withdrawal of trade benefits when
a country is not in compliance with its obligations under trade
agreements is how we enforce all of our trade laws. All of the
things of importance to Mr. Cohen and Mr. Vargo are enforced
through the threat of withdrawing trade benefits. And we have
denied ourselves the use of that very important tool for labor
right enforcement in the CAFTA, and we have completely denied
the ability to challenge a country's labor laws, the adequacy.
And in Central America where workers are fired almost every
day for trying to organize unions sometimes face violence, and
the reprisals against trade unionists are very extreme. We feel
that the laws need to be improved, we need protections against
weakening those laws, and we need effective enforcement of
those laws. We have none of those under the CAFTA labor
chapter.
Mr. Cohen. Mr. Brown, may I just----
Mr. Frank Vargo. May I be permitted a quick technical
comment?
Mr. Cohen. Just a----
Mr. Frank Vargo. Let me do this. It is important to
understand that while the CAFTA agreement has teeth, the Jordan
agreement has no teeth. Because if you read the dispute
settlement part it says this is non-binding. It doesn't mean a
thing. And also, both parties to the dispute have to agree to
allow a panel to be created. And if they don't, it will never
be created because there are no time limits on it. But the
CAFTA agreement does have the dispute settlement built right
into it.
Mr. Cohen. The one other point, if I may, Mr. Chairman, is
to mention why the enforce-your-own-law standard is
incorporated in the FTA with the countries of Central America.
And it really goes back to the direction of you, the Congress,
in the 2002 Trade Act. That was the direction that you gave the
negotiators when they were going to go forth and negotiate
trade agreements around the world. It was to be an enforce-
your-own-law standard. There had been a consideration of
requiring each of the free trade agreements to incorporate the
core ILO labor standards. That was looked at by the Congress;
it was not adopted. And that is really the basic reason why
this standard has been--Congress itself is the one that
requested it.
Mr. Brown. Mr. Cohen, I would add, the Congress that did in
fact--was included in the Trade Promotion Authority Bill, but
it also passed literally in the middle of the night with the
role call staying open for an hour and a half by two votes,
just for your information.
Ms. Lee. Congress also instructed the administration to
have equivalent dispute resolution for labor and environment
for all the principal negotiating objectives. In our view that
is not----
Mr. Rogers. I am just going to cut--this is not a debate
with the panelists, although intriguing and as interesting as
that might be. Mr. Gonzalez.
Mr. Gonzalez. Thank you, Mr. Chairman. My first question is
to Mr. Kearns, and I do want to have enough time to ask Ms. Lee
what I think is a very important question because it is the
most troubling aspect of the treaty for me. Mr. Kearns, some
would argue that CAFTA is a way of dealing with the China
problem.
Mr. Kearns. Right.
Mr. Gonzalez. All right. What I mean by that is that we do
something in our own hemisphere to strengthen everyone that
obviously are our neighbors and stuff, and it is good neighbor
policy, but it may be good economic policy and strengthen
everyone so that we are in a more competitive mode because when
you say fix the China problem, you know, they are our creditor.
They are the ones that enjoy the trade deficit and such. In
other words, they are in a superior position in many ways, and
it is worsening. But do you see that a free trade agreement
could be part of a policy of addressing what looms large in the
very near future and that is China and the changing global
circumstances?
Mr. Kearns. Well, I think there are better ways to address
the threat of China in terms of textiles and apparel than is
laid out in this agreement. There are a bunch of loopholes that
the Chinese may be able to take advantage of in yarn-forward
and single transformation. According to the Mexican Chamber of
Commerce, 58 percent of all the clothing sold in Mexico is
smuggled in from China. So China has set itself up over the
past several years to do what we see it doing since the MFA
went out of existence at the end of last year. It is just
surging and taking enormous amounts of market share here in the
U.S.
It would have been prudent, if we could turn back the
clock, to look at the phase-out periods of the MFA to make it a
15-year as opposed to a 10-year, et cetera. No one was looking
when this stuff was negotiated back in the Uruguay Round with
setting up the WTO. China wasn't on anyone's horizon, and the
countries negotiating these things all thought well, we are
just going to get increased share, access to the U.S. market at
the expense of American companies. Now China is on the scene
and it is a much different equation.
I think that the, you know, the whole notion that somehow
these roundtrip exports down there, about 35 percent or so of
our exports down there, $5 out of the $15 billion roughly
speaking, are roundtrip textile and apparel exports. I don't
see it as a way to, you know, they may--some companies,
American in the textile and apparel field, may do a little bit
better for a short amount of time, but there is just colossus.
There is this 800-pound gorilla in the room eating our lunch at
the buffet and we are discussing the hors d'oeuvres, as it
were. It is not a good long-term strategy. I don't think it
is----
Mr. Gonzalez. And I need to move on to the next question.
Mr. Kearns. Yes, sir.
Mr. Gonzalez. And I do appreciate your concerns and your
insight. Bottom line is always going to be who is our
competition, who is going to be basically our trading partners.
And either we do something in this hemisphere, and I am not
really sure how we would do it to better position ourselves,
and everyone complains when we attempt to do it. It just
depends whose ox is being gored. When labor is the greatest
cost in all of your components in whatever you are
manufacturing or producing, you are going to be at a
disadvantage whether it is Latin America or China.
And I guess I am just having a real difficult time in
trying to reach some sort of an agreement with at least those
individuals that have more in common with us, whether it is in
this hemisphere and so on. Then maybe someone who is truly the
greater competition, such as China, and that remains to be seen
on how we get there.
Ms. Lee, I know I have just 1 minute left, but obviously I
think the chairman will allow you to answer this. And it goes
back to the labor provisions of CAFTA. And what you have
already told me is this: under what we call the GSP, there is
greater ability for the United States one, to identify what is
less than satisfactory labor practices, and then promote them
because there are significant sanctions or actions that the
United States can take.
Under CAFTA what you do is you fine yourself, is that
pretty much it? It is also my understanding that the trade
representative, back in the Singapore and Chile pacts,
identified the labor provisions as maybe in those particular
treaties as maybe not applicable to Central America and South
America and so on. Yet, that is what we have presently. Isn't
that true?
Ms. Lee. Yes, that is exactly right that early on in the
negotiation process, USTR, Ambassador Allgeier said that the
Central American context was different, would require stronger
labor provisions. And then they went ahead to negotiate the
exact same, essentially, labor provisions.
And I think the point is that we are losing tools that we
have in place today, that we have the GSP tools and that the
mechanism of paying a fine that goes back to the country where
the violation occurred I don't think would be seen as
acceptable for commercial provisions, for IPR.
And certainly if you take for example the case of
Australia. We negotiated a free trade agreement with Australia.
Australia has excellent intellectual property rights laws, and
yet it wasn't considered that we didn't need an IPR chapter
with respect to Australia or that we needed a provision that
just said keep on enforcing your own IPR laws. We put in the
same IPR protections, very strong IPR protections even in the
Australia context because that is how we do trade agreements
when something matters.
And I guess what I would argue to you is the very weak and
inadequate labor rights provisions in CAFTA show that this
administration simply doesn't care. It is not a high priority
to protect workers' rights, and so they put in place very weak
provisions.
I wanted to say one word about China, which is that I think
this is a very important question, but it is essentially
wishful thinking that signing CAFTA is somehow going to help us
compete with China. We have $162 billion trade deficit with
China. We have to address directly--we need our own government,
we need our administration to step up to the plate and address
the currency manipulation, the illegal subsidies, and the
egregious repression of workers' rights and human rights in
China, because that is one of our key trading partners.
And having a little bit more ability to assemble clothing
in Central America is simply not going to address that China
problem. It is not going to help Central America. I know the
Central Americans are very concerned about the end of textile
and apparel quotas, and we heard a couple of people say today
that Central Americans are going to lose half a million apparel
jobs if CAFTA doesn't go through. There is no reason why that
would be the case. Central America still has the CBI provisions
and could have those indefinitely.
Mr. Rogers. Thanks. Unfortunately----
Ms. Lee. And if there is time----
Mr. Rogers. [continuing] I am going to have to----
Ms. Lee. [continuing] I have just one quick----
Mr. Rogers. [continuing] make that the last word. I
apologize. We have yet another panel to get through. Thank you
very, very much for taking the time to be here. We appreciate
your insight and concern. Thank you very, very much.
Mr. Cohen. Thank you.
Mr. Frank Vargo. Thank you.
Mr. Rogers. The next panel is Jack Roney, is that correct?
Mr. Roney. Yes.
Mr. Rogers. John Murphy, Dr. Russell Roberts, and Mr. David
Waskow. Thanks for that quick transition. We are going to push
on. Thank you very much for your patience today. We look
forward to hearing from you. And, Mr. Roney, we are going to
start with you and ask if you would proceed.
STATEMENTS OF JACK RONEY, DIRECTOR OF ECONOMICS AND POLICY
ANALYSIS, AMERICAN SUGAR ALLIANCE; RUSSELL ROBERTS, PROFESSOR
OF ECONOMICS, J. FISH AND LILLIAN F. SMITH DISTINGUISHED
SCHOLAR AT THE MERCATUS CENTER, DEPARTMENT OF ECONOMICS; JOHN
MURPHY, VICE PRESIDENT, WESTERN HEMISPHERE AFFAIRS, EXECUTIVE
DIRECTOR, AMERICAN CHAMBERS OF COMMERCE OF LATIN AMERICA,
UNITED STATES CHAMBER OF COMMERCE; AND DAVID F. WASKOW,
DIRECTOR OF THE INTERNATIONAL PROGRAM FRIENDS OF THE EARTH
Mr. Roney. Thank you, Mr. Chairman. I am Jack Roney, Staff
Economist for the American Sugar Alliance. I have the privilege
of speaking today on behalf of 146,000 American farmers,
workers, and their families who grow, process, and refine sugar
beets and sugar cane in 19 States.
The proposed CAFTA threatens American sugar jobs in all 19
of these States. By the government's own estimates, sugar job
losses from the CAFTA would be far greater than any other
sectors. The same International Trade Commission study also
questions the overall value of the CAFTA to our economy. The
ITC concluded that the CAFTA will increase the U.S. trade
deficit with that region, not reduce it.
Our sugar growers and processors are among the most
efficient in the world. Like other American farmers, we would
welcome the opportunity to compete globally on a level playing
field free of government intervention. Like other American
farmers, we can compete with foreign farmers. We cannot compete
against foreign government subsidies.
The world's sugar market is the world's most distorted
commodity market. A vast global array of subsidies encourages
overproduction and dumping. We support correcting this
distorted dump market through genuine global sugar trade
liberalization.
There is a right way and a wrong way to attack sugar
subsidies. The right way is the WTO, all countries all the
table, all subsidies on the table. The wrong way: bilateral and
regional FTAs where markets are wrenched open without
addressing any foreign subsidies.
Virtually every FTA every completed around the world
excludes import access mandates for sugar. Only the United
States has every guaranteed access to its sugar market in an
FTA, in the NAFTA and the CAFTA. And these agreements are mired
in controversy. Sugar must be reserved for the WTO where
genuine trade liberalization can occur.
As Congressmen from sugar-producing regions know, if the
CAFTA passes, it will have devastating effects on sugar jobs in
their states. Our farmers know their industry and their policy
well. We have examined the CAFTA provisions soberly and
carefully. We regard the CAFTA as a life or death issue.
American sugar farmers and workers who will lose their jobs are
insulted by CAFTA proponents that trivialize the potential harm
from this agreement with cutesy, misleading depictions of
additional access and teaspoons or packets per consumer per
day, or suggesting we should thank the administration for the
CAFTA.
We are already one of the world's most open sugar markets.
Past trade agreement concessions force us to import upwards of
one and a half million tons of sugar per year from 41 countries
duty-free. This makes us the world's fourth largest net
importer of sugar. The CAFTA countries and the DR are already
our biggest duty-free supplier, accounting for a fourth of all
our imports.
Unfortunately, our market is already oversupplied. Every
additional ton of sugar we are forced to import from foreign
countries is one ton less than struggling American sugar
farmers will be able to sell in their own market. Import more
foreign sugar, export more American jobs.
The CAFTA poses serious short-term and long-term dangers to
American sugar farmers and workers. In the short-term the CAFTA
sugar market access concessions, on top of import commitments
the U.S. has made already in the WTO and the NAFTA will prevent
the USDA from administering a no-cost sugar policy, as Congress
directed it to in the 2002 Farm Bill. The CAFTA will further
oversupply the U.S. sugar market.
The additional concessions will trigger off the marketing
allotment program that permits USDA to restrict domestic sugar
sales and balance the market. U.S. sugar producers are
currently holding more than a half million tons off the market
and storing it at their own expense. Absent marketing
allotments, this surplus sugar would cascade onto the market
and destroy the price.
Contrary to the misleading claims of CAFTA proponents,
there is no cushion, no additional share of the U.S. market
that Congress intended to make available in FTAs. The
difference between recent actual imports and the one-and-a-
half-million-ton marketing allotment trigger has already been
allocated to Mexico under the NAFTA. The administration is
ignoring the NAFTA to promote the CAFTA.
In the long-term CAFTA is the tip of the FTA iceberg.
Behind the CAFTA countries, 21 other sugar-exporting countries
are lined up like planes on the tarmac waiting to do their deal
with the U.S. No doubt they expect no less than the concessions
already granted to the CAFTA countries. Combined, these 21
countries export over 25 million tons of sugar per year, nearly
triple U.S. sugar consumption. Obviously, the precedent the
CAFTA concessions set would make it impossible for the U.S.
sugar industry to survive future agreements.
In conclusion, Mr. Chairman, the CAFTA will cost thousands
of American sugar farmers and workers their jobs. The certain
dangers of the CAFTA to the U.S. economy far outweigh the
marginal possible benefits. We respectfully urge the Congress
reject the CAFTA and focus U.S. trade liberalization efforts
instead on the WTO where there is genuine potential for
progress. Thank you.
[The prepared statement of Jack Roney follows:]
Prepared Statement of Jack Roney, Director of Economics and Policy
Analysis, American Sugar Alliance
The American Sugar Alliance is grateful for the opportunity to
provide testimony for this important hearing. The ASA represents the
146,000 American farmers, workers, and their families in 19 states,
engaged directly and indirectly in the growing, processing and refining
of sugarbeets and sugarcane. The U.S. sugar industry generates nearly
$10 billion in annual economic activity.
BACKGROUND ON U.S. AND WORLD SUGAR MARKETS
In some states, sugar is the most important cash crop, or among the
most important. Sugar accounts for 44% of crop receipts in Louisiana,
37% in Wyoming, 24% in Hawaii, and 10-20% in Idaho, Minnesota, Florida,
North Dakota, Montana, and Michigan.
American sugar growers and processors are among the most efficient
in the world, and, like other American farmers, we would welcome the
opportunity to compete globally on a level playing field, free of
government intervention (Chart 1). Like other American farmers, we can
compete against foreign farmers, but we cannot compete against foreign
government subsidies and predatory trading practices.
The world sugar market is the world's most distorted commodity
market, because of a vast, global array of subsidies. Subsidized
growers overproduce and dump their surpluses on the world market for
whatever price it will bring. As a result of all this dumping, the so-
called world sugar price has averaged barely half the world average
cost of producing sugar for the past 20 years (Chart 2). The ASA
supports correcting this distorted dump market through genuine global
sugar trade liberalization.
ONLY PATH TO SUGAR TRADE LIBERALIZATION: WTO
There is a right way and a wrong way to achieve global sugar trade
liberalization.
The right way: The World Trade Organization (WTO)--all countries at
the table; all programs and all subsidies on the table. The ASA
has supported sugar trade liberalization in the WTO since the
initiation of the Uruguay Round of the GATT in 1986.
The wrong way: Bilateral and regional free trade agreements (FTAs),
where markets are wrenched open without addressing any foreign
subsidies. The Administration has rightfully declared it will
not address any support programs or subsidies in FTAs. Yet it
has effectively negotiated away the U.S. sugar support program
in the CAFTA.
Virtually every FTA ever completed around the world excludes
import-access mandates for sugar. Sugar import mandates are excluded
from the U.S.-Canada portion of the NAFTA; from the Mercosur agreement
among four South American sugar producing countries, including Brazil;
from the European Union's (EU) trade agreements with South Africa, with
Japan, and now with Mercosur; from Mexico's FTAs with other Latin
American countries and with Japan; from Japan's pending agreements with
Thailand and with the Philippines. Sugar was excluded from the U.S.-
Australia FTA, which USTR touted as a ``state of the art'' agreement
that gained the U.S. immediate duty-free access for 99% of its exports
to Australia, and which Congress passed easily.
The only exceptions: Sugar market-access mandates were included in
the U.S.-Mexico portion of the NAFTA, and those provisions have been
mired in controversy ever since, and in the CAFTA, whose fate in the
Congress is highly uncertain.
The ASA's recommendation to the Administration has been long-
standing and unambiguous: Reserve sugar negotiations for the WTO, where
genuine trade liberalization can occur.
CAFTA DANGERS TO U.S. SUGAR, U.S. ECONOMY, WTO PROCESS
The U.S. sugar industry adamantly opposes the CAFTA and
respectfully suggests that this Committee do the same. The potential
benefits for the U.S. economy simply do not outweigh the definite
risks. The possible benefits are tiny: The entire GDP of the six
countries is about the same as New Haven, Connecticut's. At serious
risk are American jobs in sugar and a host of other sectors.
The government's own analysis, by the International Trade Commission
(ITC), predicts that at the end of the 15-year implementation
period, the U.S. trade deficit with the CAFTA region will have
increased, not fallen, to $2.4 billion. (``U.S.-Central
America-Dominican Republic Free Trade Agreement: Potential
Economywide and Selected Sectoral Effects,'' Investigation No.
TA-2104-13, August 2004.) Other ITC findings from the same
study:
Job losses in the sugar sector will be 38 times greater than job loss
in the next most harmed sector, textiles. ITC also predicted
American job losses in electronic equipment, transport
equipment, oil, gas, coal and other minerals.
The U.S. already has 100% duty-free access for wheat exports to the
CAFTA countries.
The U.S. already accounts for 94% of the small CAFTA market's grain
imports; and 95% of soybean imports.
The U.S. gets immediate tariff-free access only for prime and choice
cuts of beef. With 40% of the CAFTA population earning less
than $2 per day, the demand for such expensive cuts of beef
cannot be great.
FTAs such as the CAFTA distract from, and harm, the progress toward
genuine trade liberalization in the WTO.
For example, after the CAFTA countries have spent years
negotiating special access to the United States, the world's
biggest market, why should these countries cooperate in Geneva
to provide the same access to the U.S. for the rest of the
world?
The FTA approach risks fragmenting the world economy into to a
matrix of trading blocs, each with its own tariff wall around
it to protect the subsidies within. Only in the WTO can we
address both the tariff walls and the subsidies within.
Opposition to the CAFTA is widespread.
The American public correctly perceives that CAFTA dangers
outweigh the risks. Polls indicate a majority of Americans
opposes the CAFTA, including pluralities of Republicans,
Democrats, and Hispanics.
Opposition extends to labor, environmental, textile, human
rights, and faith-based organizations, both here and in the
CAFTA countries.
Some national farm groups oppose CAFTA, some others are split.
American farmers have grown understandably skeptical that the
promises of trade agreements and other efforts to expand U.S.
exports far exceed actual performance. In 1996, the U.S.
achieved a record agricultural trade surplus of $27.3 billion.
In 2004, 11 years into the NAFTA, 10 years into the Uruguay
Round Agreement on Agriculture, and 9 years after the 1996
Freedom to Farm Bill reduced commodity prices to encourage more
exports, our ag trade surplus has plummeted to zero (Chart 3)--
despite the weaker dollar that made our exports more
competitive. Our ag imports have skyrocketed under these
agreements; our exports have been essentially flat.
The CAFTA promises more of the same, particularly in the near
term. U.S. import concessions are frontloaded--concentrated in
the early years of the agreement--and CAFTA-country import
concessions are backloaded, to the final stages of the 15-year
implementation period.
As the Congressmen from sugar-producing states know, if the CAFTA
passes, it will have devastating effects on the U.S. sugar industry.
Our farmers know their industry and their policy well, and have
examined the CAFTA provisions soberly and carefully. We regard the
CAFTA as a fully genuine, life-or-death issue. Our farmers, whose
livelihoods are at stake, are insulted when USTR trivializes the
potential harm from this agreement with cutesy, misleading estimates
such as the amount of additional access in teaspoons per consumer or
production per day.
We are already one the world's most open sugar markets. Past trade-
agreement concessions have made us the world's fourth largest net
importer. We are required, under WTO concessions, to import 1.256
million short tons of sugar per year from 41 countries, essentially
duty free, whether we need the sugar or not. The six CAFTA countries
are already our largest duty free supplier, accounting for 27% of our
WTO-required imports. In addition, we are required under the NAFTA to
import up to 276,000 short tons per year of Mexican surplus sugar
production, again, whether we need the sugar or not.
Unfortunately, U.S. sugar consumption has declined in recent years,
rather than grown. As a result, every additional ton of sugar we are
forced to import from foreign countries is one ton less that struggling
American sugar farmers will be able to produce or sell in their own
market.
U.S. sugar policy is unique. It is the only U.S. commodity policy
designed to operate at no cost to taxpayers. During this time of
enormous federal budget pressures, American sugar farmers are proud to
have a program with no budgetary costs (Chart 4).
Congress in the 2002 Farm Bill provided an inventory management
approach for sugar and a mandate for the Administration to operate the
program at no cost by avoiding sugar loan forfeitures. The
Administration has two tools to balance the domestic market: the WTO-
legal tariff-rate import quota and domestic marketing allotments.
Basically, USDA forecasts U.S. sugar consumption, subtracts required
WTO and NAFTA imports, and sets the remainder as the American sugar
producers' share of their own market. With a large part of our market
guaranteed to foreign suppliers, American sugar farmers--taxpayers,
businessmen, and cooperative owners--must line up behind the foreign
farmers for access to their own U.S. market. If we produce more sugar
than our marketing allotment, our producers store the excess at their
own expense, not the government's expense, until that sugar is needed.
Congress stipulated that if imports exceed 1.532 million short
tons--the sum of the WTO commitment of 1.256 million short tons and the
NAFTA/Mexico commitment of up to 276,000 short tons--USDA would lose
its authority to administer marketing allotments and sustain no-cost
sugar-program operation. In effect, the Congress was saying: Though
American sugar producers are among the world's most efficient, we have
already ceded to foreign producers over 1.5 million short tons of the
U.S. market. Let's reserve the remainder of the U.S. market for
American farmers, rather than giving our market away, piecemeal, to
foreign producers in FTAs (Charts 5, 6).
American sugar producers are currently storing at their own expense
about 600,000 tons of surplus sugar, and many are reducing acreage,
idling or shutting down mills--many of them farmer owned--to absorb the
oversupply. Sugar prices have been flat or depressed for some time--the
raw cane sugar support price has been the same 18 cents per pound for
20 years now, since 1985; prices in 2004 averaged 11% lower than in
2003 (Charts 7, 8). Unlike other program crops, sugar farmers receive
no income support from the government to compensate for low market
prices. This allows scarce federal dollars to be directed toward
assisting farmers of export crops.
Sugar farmers, meanwhile, are making wrenching adjustments to
survive, or just going out of business. Fully a third of all U.S. beet
and cane mills and refineries have closed just since 1996, 30 plants in
total (Chart 9).
As independent beet processors and cane refiners have gone out of
business, beet and cane farmers, desperate to retain outlets for their
beets and raw cane sugar, have organized cooperatively to purchase
those operations. Beet farmers now own 94% of U.S. beet processing
capacity and cane farmers own 57% of U.S. cane refining capacity (Chart
10).
This vertical integration has helped to increase efficiency, but
growers have literally mortgaged the farm to stay afloat and are deeply
in debt. Since sugar farmers derive 100% of their return from the
marketplace and none from government payments, they are more dependent
on, and more vulnerable to, market forces than other farmers. Sugar
farmers are generally unable to switch to other crops because of their
commitment to supplying beets and cane to the processing mills they now
own. This makes sugar farmers all the more vulnerable to the type of
market disruption the CAFTA would be likely to cause.
Sugar farmers based their investment decisions on the promise in
the 2002 Farm Bill of volume and price levels that would enable them to
remain in business and repay their loans. The CAFTA, and other FTAs,
now threaten to break that promise.
LOW, STEADY U.S. CONSUMER PRICES FOR SUGAR
The low producer prices for sugar over the past several years have
been a hardship for sugar farmers and caused considerable job loss as
mills have closed. Unfortunately, consumers have seen no benefit from
the low producer prices for sugar. Though wholesale sugar prices in
2004 averaged 11% lower than the previous year and 20% less than in
1996, consumer prices for sugar in the grocery store have risen
modestly; and, sweetened product prices have continued a steady rise,
at least with the overall rate of inflation (Chart 11).
Nonetheless, American consumers are getting a great deal on the
sugar they purchase, with low, steady prices. U.S. retail sugar prices
are essentially unchanged since the early 1990's. And new figures from
LMC International show that the foreign developed-country retail sugar
price averages 30% higher than the United States'. EU average prices
are 35% higher than the United States', and retail sugar prices in
Australia and Canada, which claim to be exposed to world dump market
sugar, are virtually the same as prices here (Chart 13). (``Retail and
Wholesale Prices of Sugar around the World,'' LMC International Ltd,
Oxford, England, April 2005.)
Taking into account developing countries, and varying income
levels, LMC discovered that sugar here is about the most affordable in
the world. In terms of minutes of work to purchase one pound of sugar,
only tiny Singapore is lower; the world average is four times higher
than the U.S. And, our expenditure on sugar as a percent of per capita
income is the lowest in both the developed and the developing world
(Charts 13, 14).
WORLD AVERAGE WHOLESALE PRICES ARE DOUBLE DUMP MARKET LEVELS
In the same survey, LMC also examined wholesale refined prices and
found that the global average is 22 cents per pound--double the world
dump market average price for 2004--and about the same as the United
States'. This reinforces the meaninglessness of the world dump price.
Globally, the vast majority of sugar is sold in domestic markets at
price levels that are, on average, double the world dump market price
and similar to the United States' (Chart 15).
It is worth noting that LMC found wholesale prices in Mexico to be
5 cents higher than the United States' 23 cents per pound, and Canada's
price to be just 2 cents lower. This contradicts notions that U.S.
candy manufacturers are moving to these countries for lower sugar
prices. Other factors are far more important in those decisions. For
example, the same candy company that paid average wages in Chicago of
more than $14 per hour now pays an average of 56 cents per hour in
Juarez, Mexico (Chart 16).
CAFTA: SHORT AND LONG-TERM DANGERS TO U.S. SUGAR MARKET
Despite the fact that our market is already oversupplied, and
despite the fact that the six CAFTA countries already supply more than
a fourth of our guaranteed duty-free imports, the proposed CAFTA more
than doubles the five Central American countries' duty-free access to
the U.S. market, an increase of 111%. With an additional, smaller
concession to the Dominican Republic, additional imports would total
120,000 short tons in the first year, growing to 169,000 short tons per
year in year 15, and an additional 2,910 short tons per year forever
after (Chart 17).
The CAFTA poses serious short-term and long-term dangers to the
U.S. sugar industry.
In the short term, the CAFTA sugar market-access concessions--on
top of import commitments the U.S. has made already in the WTO, to 41
countries, and in the NAFTA, to Mexico--will prevent the USDA from
administering a no-cost U.S. sugar policy, as Congress directed it to
in the 2002 Farm Bill, and will badly further oversupply the U.S. sugar
market.
The additional concessions will trigger off the marketing allotment
program that permits USDA to restrict domestic sugar sales and balance
the market. Absent marketing allotments, surplus U.S. sugar--the
600,000 tons producers are currently holding off the market and storing
it at their own expense--would cascade onto the market and destroy the
price.
Contrary to USTR's misleading claims, there is no ``cushion''--no
amount of additional import access Congress intended to make
available in FTAs. The difference between recent actual imports
and the 1.532-million-ton trigger has already been allocated to
Mexico under the NAFTA. Mexico has not recently had the surplus
sugar available to send to the U.S. But surplus Mexican sugar
may soon become available again, with improved crops and with
the successful conclusion of sweetener-trade discussions with
Mexico that Members of Congress from sugar and corn states
strongly support.
We find it disturbing that USTR would ignore commitments made in
past agreements in order to promote new agreements.
In the longer term, the CAFTA is the tip of the FTA iceberg.
Behind the CAFTA countries, 21 other sugar-exporting
countries are lined up, like planes on a tarmac, waiting to do
their deal with the U.S. and, no doubt, expecting no less
access than already granted to the CAFTA countries. Combined,
these 21 countries export over 25 million tons of sugar per
year, nearly triple U.S. sugar consumption. Obviously, the
precedent the CAFTA concession would set will make it
impossible for the U.S. sugar industry to survive future
agreements (Charts 18, 19).
The U.S. is pushing to complete the Panama, the Andean, and
the Thailand FTAs this year. The South Africa Customs Union FTA
and the Free Trade Area of the Americas are on hold, but still
very much on the Administration's FTA agenda. All these involve
major sugar producers and exporters.
CONCLUSION
In conclusion, Mister Chairman, the certain dangers of the CAFTA to
the U.S. economy outweigh the marginal, possible benefits. We
respectfully urge that this Committee reject the CAFTA, and focus U.S.
trade liberalization efforts instead on the WTO, where there is a
genuine potential for progress.
The CAFTA would devastate the U.S. sugar industry. We are,
therefore, expending all possible resources and energy to urge Congress
to defeat this ill-conceived agreement.
Thank you.
Mr. Rogers. Dr. Roberts.
STATEMENT OF RUSSELL ROBERTS
Mr. Roberts. I want to thank the committee for the
opportunity to appear today and discuss CAFTA. On the surface
CAFTA would seem to be an easy agreement, as a number of people
have mentioned, due to the opening of foreign markets--sorry--
on the surface, as a number of people mentioned today, it would
be easy to, you would think, to support CAFTA, given the fact
that it opens markets for our producers while leaving our
markets that are already open relatively unchanged, yet trade
agreements always raise legitimate concerns about job losses in
the United States.
And having recently traveled to Costa Rica at the
invitation of the State Department to speak on trade issues, I
was struck by the similarity of the concerns in Costa Rica.
They too were worried about job loss. But in fact trade changes
the kind of jobs we do, and in a flexible market, particularly
one as dynamic as the United States, the number of jobs is
determined by how many people want to work and the skills they
have. Yes, some sectors will grow and others will get smarter.
Pointing to NAFTA, job losses without accounting for job gains
is the wrong way to evaluate free trade agreements. Similarly,
trade deficits have little or no impact on the total number of
jobs in the United States, despite concerns to the contrary.
I spoke to a wide array of people in Costa Rica, students,
journalists, labor representatives, and government cabinet
ministers, and being a small country that has undergone a great
deal of economic change in the last 25 years, they were very
aware of the benefits of being a part of the global trading
system. They also understood the uncertainty and
unpredictability of the future. But most Costa Ricans I spoke
to embraced economic change and trade as the inevitable key to
growth for their small country and a transformation of their
economy.
But they would always ask the same question: if trade is
good, why doesn't CAFTA allow Costa Rica to export sugar freely
to the United States? If Costa Rica is willing to compete with
U.S. engineers and other farmers, why isn't America willing to
compete and cope with the challenge of Costa Rican sugar
farmers? Despite the words ``free trade'' in the title of the
agreement, CAFTA would allow only the tiniest of expansions in
sugar imports phased in over 15 years.
And they would ask me why do Americans fear Costa Rican
sugar? They don't, I would explain, not most Americans anyway.
In fact keeping out foreign sugar punishes me and every other
consumer in the U.S. because the U.S. price is roughly double
the rest of the world. We American consumers are punished, not
you Costa Ricans, by the decision to keep virtually all sugar
from Costa Rica out that would come in in a free market.
Jobs created in the sugar industry here in the United
States are offset by job losses in the American candy and food
industry and elsewhere. So we negotiate a trade agreement with
some of the poorest countries in the region, but we make sure
that one of the things they do best, which is grow sugar, is
essentially off the table. There is no attractive way to defend
that policy when you are standing in the fields of a poor
county.
So CAFTA is not perfect. In a perfect world sugar would be
freely traded. But CAFTA is a step in the right direction. It
lowers trade barriers on an enormous range of products that are
traded in the region. The best should not be the enemy, the
good. The CAFTA will encourage the signatories to the agreement
to do what they do best. The result will be a higher standard
of living.
And ironically, sugar has become the flashpoint for this
discussion even though the sugar industry gets preferential
treatment under CAFTA, even though they have quotas in place
and tariffs that isolate them from world competition, even
though the sugar industry has made sure that CAFTA leaves their
domestic monopoly virtually intact, somehow the entire debate
over CAFTA is about sugar jobs. That is quite an achievement
for an industry with less than 60,000 employees.
The job losses in sugar to CAFTA will be dwarfed by
retirement, turnover, job loss due to technology. Should the
threat of these job losses hold this agreement hostage and
prevent poor nations from buying our goods? Should the threat
of these job losses prevent the expansion of U.S. employment in
sectors that will grow?
Our natural concern for these workers should not confuse us
about the cost of stopping economic change that CAFTA will
bring. Economic change like free trade creates our standard of
living. Without economic change, without trade, our economy
would be stagnant.
Now, economic change is always challenging. I was
explaining to my children the other day, they are here; they
are off from school, by the way. Their school is not in
session. I am not violating any truancy laws. But I explained
to them when American baseball players were considering letting
in African American players, you can imagine that American
players born here in the United States who were white would be
afraid of that competition. And my 7-year-old, who is sitting
right there in the brown shorts, said, but that wouldn't be
fair. He said it wouldn't be nice to keep out African American
players. And said besides, it would be good for the team.
Shouldn't the players be in favor of that?
And that got me thinking about the Dominican Republic. At
the start of this year's baseball season, 385 players born in
the Dominican Republic had played in the major leagues,
including Pedro Martinez, Miguel Tejada, Vladimir Guerrero,
Manny Ramirez. Surely the game of baseball, surely our lives,
surely their lives are better for letting them play here. Who
would argue we should keep them out in order to create more
opportunity for native-born Americans in baseball? And as my 7-
year-old understands, it wouldn't be nice. It would be bad for
baseball and its fans.
It is good that we have let players from all over the world
come to America to use their skills to the greatest advantage,
and it would be good to let other things, besides baseball
players, come to the United States from the Dominican Republic
and our fellow nations in Central America. In return, we will
send our products using our skills to help them. CAFTA will be
good for the United States, good for the Dominican Republic,
and good for Central America. It will raise the standard of
living in each nation, but perhaps more importantly, it will
make sure that the peoples of each nation have the greatest
opportunity to use their skills in the most effective and
productive ways. Thank you very much.
[The prepared statement of Russell Roberts follows:]
Prepared Statement of Russell Roberts, Professor of Economics, Smith
Distinguished Scholar, Mercatus Center, George Mason University
Mr. Chairman. Congressman Schakowsky. Members of the committee.
Thank you for the opportunity to appear before you and discuss CAFTA,
the Central American Free Trade Agreement, which now includes the
Dominican Republic as well.
On the surface, CAFTA would seem to be an easy agreement for the
United States to support. Many products and services already arrive
duty-free in the United States from Central America. But under CAFTA,
many products and services currently protected in Central America would
now have to compete with American exports, opening markets to numerous
American products.
Yet CAFTA remains highly controversial with concerns that the
agreement will cost the United States jobs trying to compete with low-
wage workers in Central America working in a less demanding regulatory
environment.
Having recently traveled to Costa Rica at the invitation of the
State Department to speak on trade issues, I was struck by the
similarity of the concerns raised in Costa Rica. Surely, little Costa
Rica would have no chance of standing up to the United States economy.
Jobs would be lost to the powerful American workers.
Both arguments cannot be right. It cannot be that employment in
both economies will shrink as the other expands. One of these worries
is wrong. Or both are. But both cannot be right.
Both are wrong. When NAFTA passed, we were told of the millions of
jobs that would inevitably flow to Mexico because of Mexico's lower
wages and less rigorous labor and environmental standards. Yet those
fears were unrealized. They were no more plausible than the notion that
all of America's jobs would end up in Mississippi because of
Mississippi's low wages.
Trade changes the kind of jobs we do, but in a flexible labor
market, particularly one as dynamic as the United States, the number of
jobs is determined by how many people want to work and the skills they
have. The main effect of trade is to allow both trading parties to use
their skills wisely and effectively.
Costa Rica currently has a state monopoly on telecommunications.
There are a lot of engineers employed by that state monopoly. What will
happen to them when that monopoly is opened to competition by CAFTA?
Some will keep their jobs working in areas like land-line phones that
the government will probably still be able to provide competitively.
Some will find work with American firms now free to operate profitably
in Costa Rica. Some will lose their jobs and find work as engineers
outside of the telecommunications industry. And some will lose their
jobs and find work outside of engineering.
The average Costa Rican who is not an engineer employed by the
state-run telecom company will be better off. The average Costa Rican
will enjoy lower prices and more choices. That will mean more resources
left over to do new things with, new products and services to enjoy
that were not affordable before. That in turn will mean more employment
in Costa Rica as those products and services expand, offsetting any job
losses in the engineering sector.
The bottom line for Costa Rica is better phone service and internet
access at lower prices and more opportunities created elsewhere in the
economy. Understandably, Costa Rican engineers are nervous about the
uncertainty and challenges of the future. But the net effect on Costa
Rica would be positive.
The same logic applies to the Costa Rican car industry. Wisely,
Costa Rica doesn't have a car industry--it would be too expensive. It
would create inefficient and unproductive jobs in the car sector
relative to other sectors. By importing cars, Costa Rica gives up those
jobs and creates jobs elsewhere. By importing cars, Costa Rica uses the
skills of its people more wisely and the result is less expensive cars
for Costa Ricans to enjoy.
I spoke to a wide array of people in Costa Rica--students,
journalists, labor representatives and government cabinet ministers.
Being a small country that has undergone a great deal of economic
change in the last 25 years, they were very aware of the benefits of
being part of the global trading system. They also understood the
uncertainty and unpredictability of the future. But most Costa Ricans I
spoke to embraced that change as an inevitable part of growth and the
transformation of their economy.
But they would always ask the same question. If trade is good, why
doesn't CAFTA allow Costa Rica to export sugar freely to the United
States? Costa Rica is willing to cope with the challenge of competing
with American telecom engineers and American telecom companies? Why
isn't America willing to cope with the challenge of Costa Rican sugar
farmers?
They were referring to the fact that while American farmers and
telecom companies and medical device companies would have relatively
open access to sell their products in Costa Rica, sugar farmers in
Costa Rica would have very little freedom to sell their sugar in
America. Despite the words ``free trade'' in the title of the
agreement, CAFTA would allow only the tiniest of expansions in sugar
imports phased in over 15 years. CAFTA limits the expansion of sugar
imports into the United States to less than 2% of US consumption over
the next 15 years.
Why do Americans fear Costa Rican sugar?
They don't, I would explain to my hosts in Costa Rica. Not most
Americans, anyway. In fact, keeping out foreign sugar punishes me and
every other consumer in the United States. The US price of sugar is
roughly double that of the rest of the world. We are punished, not you,
I explained, by the decision to keep out virtually all sugar from Costa
Rica that might come in under a truly open market. Jobs created in the
sugar industry are offset by job losses in the American candy and food
industries and elsewhere.
So we negotiate a trade agreement with some of the poorest
countries in the region but we make sure that one of the things that
they do best, grow sugar, is essentially off the table. There is no
attractive way to defend that policy when you're standing in the fields
of a poor country.
It makes no more sense for America to insist on always growing its
own sugar than it does for Costa Rica to use protectionism to create a
Costa Rican car industry. But that is what we have decided with CAFTA.
So CAFTA is not perfect. In a perfect world, sugar would be freely
traded along with telecom services and cars and tourism and ornamental
plants and corn and chicken. But CAFTA is a step in the right
direction. It lowers trade barriers on an enormous range of products
that are traded in the region. The best should not be the enemy of the
good. CAFTA will encourage the signatories to the agreement to do what
they do best and the result will be a higher standard of living for all
of the partners to the agreement.
Ironically, despite the special treatment of the American sugar
industry in CAFTA, the American sugar industry has become the
flashpoint for the debate over the agreement in this country. Even
though the sugar industry gets preferential treatment, even though the
sugar industry has quotas and tariffs in place that isolate them from
world competition, even though the sugar industry has made sure that
CAFTA leaves their domestic monopoly virtually intact, somehow, the
entire debate over CAFTA is about fear of losing jobs in the sugar
industry.
That's quite an achievement for an industry with less than 60,000
employees. (The sugar industry claims there are 372,000, but that
number is inflated by counting corn sweetener jobs and then multiplying
the total by two and a half.) About 8 million jobs are destroyed and
created every quarter in the US economy. When the economy is going
well, more jobs are created than destroyed. When we are in a recession,
more jobs are destroyed than created. But the norm is good times--a
growing economy where there is net job growth, where more jobs are
created than destroyed. But even in good times, millions of jobs
disappear for thousands of reasons--companies go out of business,
consumers decide they want fewer of one thing and more of another.
These jobs are replaced by new jobs in new companies or companies that
are expanding.
Millions of jobs appearing and disappearing. That is a sign of
great economic health, that churning of jobs in response to new
desires, new information, new technology and new opportunity. All of
those jobs destroyed and created in response to economic change. It is
a strange thing to exert all this political energy to stop economic
change in one tiny sector, the sugar industry, but because it is
identifiable, the sugar jobs and the sugar profits get special
treatment.
Our natural concerns for workers in the sugar sector and other
sectors that will be affected by CAFTA should not confuse us about the
costs of stopping the economic changes that CAFTA will bring. Economic
changes like free trade create our standard of living and the
incredible opportunities that each generation has to shape the world
according to its dreams and skills. Without economic change, without
trade, without innovation, our economy would be stagnant. A dynamic
economy and a growing standard of living are the greatest gifts we can
give each generation.
Even with such benefits, economic change is always challenging, no
matter its source and no matter how small or how fair such change is. I
was explaining to my children how understandable it is for people to
fear change and competition. For example, I explained, imagine being a
white baseball player when there was discrimination in baseball and
African-American players were not allowed to play in the major leagues.
You would be worried about losing your job to a better player. My
seven-year old did not find this understandable. What about Willie
Mays, he wondered. And he told me that the white players should have
been in favor of letting African-Americans play because it would be
good for the team. Besides, he said, keeping out some players because
of the color of their skin isn't nice.
That got me thinking about the Dominican Republic. At the start of
this year's baseball season, 385 players born in the Dominican Republic
had played in the major leagues including Pedro Martinez, Sammy Sosa,
Albert Pujols, Miguel Tejada, Vladimir Guerrero and Manny Ramirez.
Surely, the game of baseball is better for allowing them to play here.
Surely our lives as fans have been enriched by their excellence. And
surely their lives have been enhanced by the opportunity to play here.
Who would argue that we should keep them out in order to create
more opportunity in baseball for native-born Americans? As my seven
year old understands, that would not be nice. And it would be bad for
baseball and its fans.
It is good that we have let players from all over the world come to
America to use their skills to their greatest advantage. Both America
and those players benefit. And it will be good to let other things
besides baseball players come to the United States from the Dominican
Republic and her fellow nations in Central America. In return, we will
send our products using our skills to help them in return. CAFTA will
be good for the United States, good for the Dominican Republic and good
for Central America. It will raise the standard of living of each
nation, but perhaps more importantly, it will make sure that the
peoples of each nation have the greatest opportunity to use their
skills in the most effective and productive ways.
Mr. Stearns. Thank you. Mr. Murphy.
Mr. Murphy. Mr. Chairman----
Mr. Stearns. I think you need to put your mike on. Yes.
STATEMENT OF JOHN MURPHY
Mr. Murphy. Mr. Chairman, Congresswoman Schakowsky, I would
like to thank the committee for the chance to testify here
today.
Speaking on behalf of the U.S. Chamber of Commerce, which
is the nation's largest business federation representing more
than three million businesses of every size, sector, and
region, the U.S. Chamber and its members strongly support DR-
CAFTA.
While these six countries look small on a map and they are
significantly poorer than the United States, they are excellent
customers for U.S. products. In 2004 the six countries
purchased over $15 billion in U.S. exports. That is more than
India, Indonesia, and Russia combined. It is also more exports
than Italy purchased from the United States; Italy, a G-7
country that is one of the largest and most sophisticated
economies in the world.
A number of members of the committee and witnesses have
already commented on how DR-CAFTA will give American companies
a level playing field. The fundamental point is that the U.S.
market is already open, but our trading partners, tariffs, and
quotas continue to stand as a significant barrier to U.S.
exports. This point is critical and has been well made.
I would like to focus my comments on the profound value of
the agreement as a vehicle for generating new business
opportunities for American companies by energizing economic
reform in Central America and the Dominican Republic, questions
that go beyond simply cutting tariffs.
One of the Central American trade ministers once commented
that ``DR-CAFTA contains 15 years worth of economic reform in a
single package,'' reforms that these countries could not have
tackled with such ambition or speed under other circumstances.
Consider the following: first, DR-CAFTA will guarantee
transparency in government procurement. The agreement mandates
competitive bidding for contracts and that extensive
information about these opportunities be made available on the
Internet and not just to well-connected insiders. In this
sense, DR-CAFTA is an extremely useful weapon against
corruption.
Second, DR-CAFTA will ensure a level playing field for
services, the most rapidly growing portion of U.S. companies'
engagement in international trade, and one where the United
States enjoys a large surplus. To give a specific example, DR-
CAFTA will open the telecommunications and insurance markets of
Costa Rica where U.S. companies are currently shut out. Many
other sectors, from express delivery to financial services,
will see new and transparent rules that will allow U.S.
companies to compete and prosper in the region, generating jobs
and income there and back home in the United States.
Third, DR-CAFTA will shore up legal protections for
copyrights, patents, and trademarks so that creative artists
who produce movies and television shows, researchers who create
new medicines, and companies that create software will be
protected. Counterfeiters will be put on notice that these
countries will protect intellectual property, which is the
future of the U.S. economy with the full force of the law. And
new resources will be directed to enforcement.
Members of the committee, these free trade agreements work.
Consider the U.S.-Chile Free Trade Agreement, which DR-CAFTA
resembles in many respects. The Department of Commerce reports
that U.S. exports to Chile rose by an astonishing 33 percent
last year, which was the first year of that free trade
agreement's implementation. We have seen similar advances
already as this Caribbean Basin Initiative and its successors
over the past 20 years have doubled and tripled trade with
these countries.
How often does the Congress have a chance to secure such a
remarkable win-win for our workers, farmers, and companies, and
for our friends and neighbors? If U.S. companies, workers, and
consumers are to thrive in an increasingly competitive world,
new trade agreements such as DR-CAFTA will be critical.
In the end, American business is quite capable of competing
and winning against anyone in the world when markets are open
and the playing field is level. All we are asking for is a
chance to get in the game. I appreciate the leadership of this
committee and the chance to testify today. Thank you.
[The prepared statement of John Murphy follows:]
Prepared Statement of John Murphy, Vice President, Western Hemisphere
Affairs, Executive Director American Chambers of Commerce in Latin
America, United States Chamber of Commerce
The Chamber of Commerce of the United States of America (U.S.
Chamber) and the Association of American Chambers of Commerce in Latin
America (AACCLA) are pleased to present the House Committee on Energy
and Commerce Subcommittee on Commerce, Trade, and Consumer Protection
with this testimony regarding the U.S.-Dominican Republic-Central
America Free Trade Agreement (DR-CAFTA). Our organizations strongly
support Congressional approval of this landmark trade agreement, and we
urge the House to do so as soon as possible.
The U.S. Chamber is the world's largest business federation,
representing more than three million businesses of every size, sector
and region. AACCLA represents 23 American Chambers of Commerce in 21
Latin American and Caribbean nations, and its 20,000 member companies
manage over 80% of all U.S. investment in the region.
International trade plays a vital part in the expansion of economic
opportunities for our members. As such, the U.S. Chamber and AACCLA
have helped lead the business community's effort to make the case for
new free trade agreements. We do so because U.S. businesses have the
expertise and resources to compete globally--if they are allowed to do
so on equal terms with our competitors.
From this perspective, DR-CAFTA is an outstanding trade agreement.
It will slash trade barriers for U.S. exports, enhance protections for
U.S. investment overseas, and strengthen the competitiveness of
American companies--both big and small--throughout the world. We
believe the agreement is worthy of your support.
OPENING TRADE, GENERATING GROWTH
America's international trade in goods and services accounts for
nearly a fifth of our country's GDP. As such, it is difficult to
exaggerate the importance of the leadership demonstrated by Congress in
renewing Presidential Trade Promotion Authority (TPA) two and a half
years ago. As we predicted, this action by Congress has helped
reinvigorate the international trade agenda and has given a much-needed
shot in the arm to American businesses, workers, and consumers.
When TPA lapsed in 1994, the United States was compelled to sit on
the sidelines while other countries negotiated numerous preferential
trade agreements that put American companies at a competitive
disadvantage. As we pointed out to Congress during our aggressive
advocacy campaign for approval of TPA, the United States was party to
just three of the roughly 150 free trade agreements in force between
nations at that time.
The passage of TPA allowed the United States to complete
negotiations for bilateral free trade agreements with Chile, Singapore,
Australia, and Morocco, all of which won bipartisan approval in
Congress. These agreements are already bearing fruit; for example, the
Department of Commerce reports that U.S. exports to Chile rose by an
astonishing 33% in 2004, the first year of implementation of the U.S.-
Chile Free Trade Agreement. Free trade agreements with roughly 20
additional countries are now in various stages of completion.
Why is DR-CAFTA so critical? First, the agreement is good for
workers, consumers, and businesses in the United States. And second,
the agreement is good for workers, consumers, and businesses in Central
America and the Dominican Republic.
BIG MARKETS, BIG OPPORTUNITIES
The commercial benefits of DR-CAFTA for the United States are
expected to be highly significant. While these six democracies look
small on a map, they are excellent customers for American business.
Purchasing $15.7 billion in U.S. exports in 2004, Central America and
the Dominican Republic buy more U.S. goods than Australia, Italy, or
Sweden.
These existing trade flows make DR-CAFTA the largest free trade
agreement in more than a decade. In fact, the 45 million citizens of
Central America and the Dominican Republic purchase more U.S. goods
than the 1.5 billion citizens of India, Indonesia, and Russia--
combined.
What is the United States selling to these countries? About one-
third of all U.S. exports to Central America and the Dominican Republic
are made by the U.S. textile and apparel industries. Computers,
electronics, and information technology products represent almost
another third. And farm products, ranging from soup to nuts, account
for a large share of American sales to the six countries.
This success story began 20 years ago, when a tremendous bipartisan
coalition created the Caribbean Basin Initiative. By a vote of 392 to
18, the House of Representatives decided in July 1983 to do away with
most tariffs on imports from Central America and the Caribbean in an
effort to help the region with ``trade, not aid.'' The Senate followed
suit with a similarly significant favorable vote.
The Caribbean Basin Initiative eliminated tariffs on nearly all
imports from Central American and the Caribbean. In 2003, 77% of
Central American and Dominican industrial products (including 99% of
non-apparel industrial products) and 99.5% of agricultural products
entered the United States duty-free.
MAKING TRADE A TWO-WAY STREET
More than any previous free trade agreement, DR-CAFTA is about
reciprocity. It will level the playing field for the thousands of U.S.
workers and businesses that rely on exports to Central America and the
Dominican Republic. It will provide immediate, duty-free access to the
six-country market for more than 80% of U.S. consumer and industrial
goods and more than half of all U.S. agricultural exports to the six
countries, with further openings phased in.
To gauge the commercial value of the agreement, the U.S. Chamber of
Commerce has released a series of state-by state economic impact
studies that found substantial economic gains for American workers and
the economy from DR-CAFTA. We used a widely respected input-output
economic model known as RIMS II that has been used for years by
economists at the U.S. Department of Commerce and elsewhere, and we
proceeded with some very conservative assumptions about the growth of
exports. For instance, we assumed that U.S. exports to the six
countries would grow at only half the rate of growth of exports to
Chile in 2004, the first year of implementation of the free trade
agreement with that country.
The results are extremely promising. In the first year of DR-
CAFTA's implementation, the agreement would generate $3.9 billion in
new sales across all industries and $866 million in new earnings for
workers in the 12 states profiled. In would also create over 26,000 new
jobs in its first year. This table summarizes our findings:
Summary of Findings of State-by-State Economic Impact Studies
The full studies are available at: www.uschamber.com/goto/drcafta
----------------------------------------------------------------------------------------------------------------
Increased earnings New jobs
AFTER ONE YEAR Increased sales of employees in created in
in all industries all industries all industries
----------------------------------------------------------------------------------------------------------------
Alabama................................................. 190,000,000 40,000,000 1,490
California.............................................. 221,000,000 51,000,000 1,287
Florida................................................. 985,000,000 232,000,000 7,008
Georgia................................................. 262,000,000 52,000,000 1,516
Illinois................................................ 79,000,000 24,000,000 693
Louisiana *............................................. 339,000,000 77,000,000 2,769
New Jersey.............................................. 71,000,000 14,000,000 342
New York................................................ 149,000,000 32,000,000 794
North Carolina.......................................... 736,000,000 163,000,000 5,404
Pennsylvania............................................ 94,000,000 20,000,000 608
South Carolina.......................................... 167,000,000 27,000,000 912
Texas................................................... 683,000,000 134,000,000 3,326
TOTAL................................................... $3,976,000,000 $866,000,000 26,149
----------------------------------------------------------------------------------------------------------------
* ``CAFTA: Potential for Louisiana's Prosperity,'' by Dr. James A. Richardson, Alumni Professor of Economics,
Louisiana State University, March 2004. This study used the U.S. Department of Commerce's Bureau of Economic
Analysis Regional Input-Output Modeling System (RIMS II) in the same fashion as the U.S. Chamber studies.
However, the figures cited in this table are based on a projected increase in exports from Louisiana to the
other DR-CAFTA countries of 16%. The U.S. Chamber studies use a figure of 17% for the first year. For
comparison, U.S. exports to Chile rose by 33% in 2004, the first year of implementation of the U.S.-Chile Free
Trade Agreement.
Nine years after implementation, DR-CAFTA would boost sales by over
$20 billion in the 11 states for which data are available. In the same
period, the agreement would raise workers' earnings by $4.5 billion and
create more than 130,000 new jobs in the 11 states.
----------------------------------------------------------------------------------------------------------------
Increased earnings New jobs
AFTER NINE YEARS Increased sales of employees in created in
in all industries all industries all industries
----------------------------------------------------------------------------------------------------------------
Alabama................................................ 1,021,000,000 214,000,000 7,901
California............................................. 2,486,000,000 573,000,000 13,132
Florida................................................ 5,200,000,000 1,200,000,000 36,982
Georgia................................................ 1,405,000,000 283,000,000 8,691
Illinois............................................... 445,000,000 97,000,000 2,402
New Jersey............................................. 381,000,000 79,000,000 1,801
New York............................................... 802,000,000 173,000,000 4,215
North Carolina......................................... 3,900,000,000 876,000,000 28,913
Pennsylvania........................................... 504,000,000 107,000,000 3,062
South Carolina......................................... 701,000,000 144,000,000 6,273
Texas.................................................. 3,600,000,000 718,000,000 17,127
TOTAL.................................................. $20,445,000,000 $4,464,000,000 130,499
----------------------------------------------------------------------------------------------------------------
As noted above, the vast majority of Central American and Dominican
exports already enter the U.S. marketplace duty-free, so the risk of
job losses due to enhanced competition from imports is extremely
limited. In sectors where imports from Central America and the
Dominican Republic are not entering the United States duty-free, the
U.S. average tariff is significantly lower than that faced by our
exports to these countries. While U.S. rates average 3.6%, Guatemala's
average applied industrial tariff is 7.1%, Honduras's is 6.7%, El
Salvador's is 6.5%, Nicaragua's is 4.9%, Costa Rica's is 4.6% and the
Dominican Republic's is 10.7% (2001 figures).
SUPPORT FROM FARMS TO FACTORIES
The Chamber is far from alone in recognizing the potential of DR-
CAFTA; studies prepared by other organizations have also projected
impressive gains. A study by the American Farm Bureau Federation, which
is the nation's largest association of farmers and ranchers, projected
that the agreement will boost U.S. agricultural exports by $1.5
billion, which explains why over 50 leading agricultural commodity
groups have endorsed the agreement.
In the textile and apparel sectors, the agreement will promote even
stronger partnerships between companies in the United States, Central
America, and the Dominican Republic. This will enable this hemisphere
to compete more effectively in the face of rising international
competition in these sectors since the demise of the global system of
quotas on textiles on January 1, 2005. Most experts predict that Asian
textile and apparel manufacturers will be the principal beneficiaries
of the end of quotas--at the expense of apparel producers in Central
America and the Dominican Republic, and their textile suppliers in the
United States.
For years, the U.S. textile industry has benefited from an
integrated supply chain and market with the DR-CAFTA nations, which
constitute a key sourcing location for U.S. apparel and retail
companies. Unlike other garment production centers, Central America and
the Dominican Republic have emerged as the dominant consumers of U.S.
textile products. Since the passage of the U.S.-Caribbean Basin Trade
Partnership Act in 2000, the region has become one of the largest and
fastest growing export markets for U.S. cotton growers, yarn spinners,
and fabric mills.
As a result, garments imported from Central America and the
Dominican Republic have U.S. content exceeding 50% while garments
imported from Asia typically have less than 1% U.S. content. Without
DR-CAFTA, apparel operations in Central America and the Dominican
Republic will not be able to compete with Asian manufacturers, who have
been ramping up sales since the global quota regime on textiles ended
in January. If apparel manufacturers in Central America and the
Dominican Republic cannot compete with Asia, a domino effect will hit
cotton growers, yarn spinners, and fabric mills in the United States as
their best customers go under.
On a more general level, the evidence is overwhelming that trade is
a powerful tool to strengthen the U.S. economy. As former U.S. Trade
Representative Robert Zoellick has pointed out, the combined effects of
the North American Free Trade Agreement (NAFTA) and the Uruguay Round
trade agreement that created the World Trade Organization (WTO) have
increased U.S. national income by $40 billion to $60 billion a year.
This helped lead to the creation of millions of new American jobs in
the past 15 years. Many of these jobs were created in the export sector
where, on average, jobs pay 13 to 18% more.
In addition to the increased wages, the lower prices generated by
NAFTA and the Uruguay Round on imported items mean that the average
American family of four has gained between $1,000 to $1,300 in spending
power--an impressive tax cut, indeed.
BENEFITS FOR CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
The U.S. Chamber and AACCLA are speaking in favor of DR-CAFTA to
advance the interests of U.S. businesses, workers, and consumers.
However, it's clear that the agreement will also be beneficial for
workers, consumers, and businesses in Central America and the Dominican
Republic--some of our closest neighbors.
Consider what Central America and the Dominican Republic were like
20 years ago. Several of these countries were at war, internally, and
with violence spilling across their borders. Contrast that with the
peaceful and democratic elections we have seen just in the past 18
months in El Salvador, Guatemala, and the Dominican Republic. It's
worth recognizing that the outgoing administrations all supported DR-
CAFTA strongly--and so do the new ones. These countries made some tough
choices, and they've been rewarded with economic growth and progress in
the fight against poverty.
Consider the example of El Salvador, which in the 1990s brought
inflation under control, fought corruption, and moved toward a more
free market economy. As a result, per capita incomes in El Salvador
grew 10 times faster in the 1990s than in the 1980s.
Again, if things are going so well, what do we need DR-CAFTA for?
The agreement is strong medicine, and it represents an opportunity to
make sure the progress of the past two decades doesn't slip away. The
agreement will enhance democratic institutions, business transparency,
and economic reform--all while locking in a strong partnership with the
United States. Consider the following:
1) DR-CAFTA will guarantee transparency in government procurement, with
competitive bidding for contracts and extensive information
made available on the Internet--not just to well-connected
insiders;
2) DR-CAFTA will ensure a level playing field in the regulatory
environment for services, including telecoms, insurance, and
express shipments; and
3) DR-CAFTA will shore up legal protections for copyrights, patents and
trademarks, so that creative artists who produce movies and
television shows, researchers who create new medicines, and
companies that create software will be protected. Pirates and
counterfeiters will be put on notice that these countries will
protect intellectual property with the full force of the law.
FIGHTING POVERTY, HELPING WORKERS
Finally, DR-CAFTA will help in the fight against poverty. Despite
significant progress in the past 20 years, many Central Americans
continue to live on just a few dollars a day. By enhancing
opportunities for economic growth, the agreement will help provide jobs
at all levels of the Central American and Dominican economies, while
providing governments with additional resources for much-needed
education, health care, and basic infrastructure projects.
Some critics charge that the agreement doesn't do enough to protect
workers' rights, even though it does more in this regard than any trade
agreement in history. The agreement builds on the fact that five of
these countries have ratified all eight of the core conventions of the
International Labor Organization; the sixth country, El Salvador, has
ratified six of the conventions and is already upholding the final two
based on provisions in its own constitution.
The Washington Post summarized the situation in an editorial: ``It
is a bad idea to oppose trade deals on the grounds that labor
protections are advancing, but not quite fast enough--This neglects the
truth that the best way to boost workers' bargaining capacity is to
boost job creation, so that labor is in strong demand. Trade deals that
create jobs are good for workers' rights as well as workers' incomes.''
We agree.
WHAT THE CHAMBER IS DOING
The U.S. Chamber and AACCLA are conducting an ambitious educational
strategy to build support for Congressional approval of DR-CAFTA. In
concert with our partners in the Business Coalition for U.S.-Central
America Trade, the Chamber and AACCLA have organized hundreds of face-
to-face meetings with members of Congress to make the case for the
agreement. We have also met with members of Congress in their districts
throughout the country as part of our ongoing ``TradeRoots'' program to
educate business people and workers about the benefits of open trade.
We have found broad support for the agreements, both in the Congress
and in the business community.
As part of this ``TradeRoots'' effort, the U.S. Chamber and AACCLA
have published a ``Faces of Trade'' book to highlight small businesses
in the United States that are already benefiting from trade with
Central America and the Dominican Republic--and that stand to benefit
even more from free trade with these two markets. We invite you to
review these success stories and see the face of American trade today
(electronic copies of the book are available at www.traderoots.org). It
isn't just about multinational corporations, which can usually find a
way to access foreign markets, even where tariffs are high. DR-CAFTA
will first assist the hundreds of thousands of small companies that are
accessing international markets--and that are meeting their payroll,
generating jobs, and growing the American economy.
The U.S. Chamber and AACCLA are also making the case for the
agreement in a nationwide tour with the Central American and Dominican
ambassadors to meet with local business people, farmers, and
journalists in their home towns. We've organized major events in more
than a dozen cities with the ambassadors, and people from all walks of
life are excited to learn about how DR-CAFTA will create new
opportunities for business and employment.
This is just the tip of the iceberg. We've generated a wealth of
information about the potential benefits of these agreements and our
efforts to make them a reality. In the interest of brevity, I would
simply urge you to contact the Chamber if you need more information.
Our websites are a good place to start: www.uschamber.com and
www.aaccla.org. Another great source of information is the website of
the Business Coalition for U.S.-Central America Trade at
www.uscafta.org.
CONCLUSION
Trade expansion is an essential ingredient in any recipe for
economic success in the 21st century. If U.S. companies, workers, and
consumers are to thrive amidst rising competition, new trade agreements
such as DR-CAFTA will be critical. In the end, U.S. business is quite
capable of competing and winning against anyone in the world when
markets are open and the playing field is level. All we are asking for
is the chance to get in the game.
The U.S. Chamber and AACCLA appreciate this committee's leadership
on these critical issues, and we ask you to move expeditiously to bring
DR-CAFTA to a vote. Thank you.
Mr. Stearns. Thank you. Mr. Waskow.
STATEMENT OF DAVID F. WASKOW
Mr. Waskow. Good afternoon. I am David Waskow, Director of
the International Program at Friends of the Earth. Friends of
the Earth is a national environmental organization and a member
of Friends of the Earth International, which is the world's
largest environmental federation with more than one million
members in 70 countries.
We believe that international trade and investment can and
should be supportive of environmental protection. However this
agreement lacks adequate environmental provisions and also
includes provisions that would themselves directly undermine
hard-won environmental protections. Because of CAFTA's negative
implications for environmental protection, a wide range of
major U.S. environmental organizations and dozens of
environmental groups in Central America oppose this CAFTA.
CAFTA is an extremely important trade agreement in
environmental terms. Central America is one of the most bio-
diverse regions on the planet with more than 8 percent of all
living species in the world. The region has already lost more
than 70 percent of its forest cover and urban and rural
pollution are rampant. Unfortunately, however, essential
environmental protections are lacking in much of the region.
For instance, in its own environmental review of the agreement,
USTR itself determined that Guatemala and Honduras are lacking
basic environmental laws. And most countries in the region have
disjointed and under-funded policies.
CAFTA would only exacerbate the existing problems in the
region by opening Central America to substantial changes in
industrial and agricultural development, many of which would
worsen the environmental situation if left unregulated.
Unfortunately, the agreement's environmental provisions are
inadequate to this task. First, CAFTA does not mandate any
country to adopt or maintain a set of basic environmental laws,
a serious omission given the weak environmental standards that
are currently in place. Only one environmental provision, as in
the labor chapter, that countries enforce their already-
existing laws as subject to dispute settlement, and there is a
lack of parity between commercial and environmental provisions,
in dispute settlement, a clear step backward from the U.S.-
Jordan agreement.
The environmental provisions also include numerous
loopholes, for instance, the requirement that countries enforce
their own laws does not even apply to laws whose primary
purpose is natural resource manage, such as forestry management
laws.
The agreement also includes no guarantees of a permanent,
dedicated, and adequate source of new funding for environmental
capacity building. And interestingly, the Bush Administration,
in its fiscal year 2006 budget zeroed out any funding for
capacity building for the region connected to CAFTA.
In addition, although CAFTA includes a citizen submission
process that you heard about from Ms. Vargo to allege
enforcement failures, it doesn't provide for any clear outcomes
or actions to ensure enforcement of environmental laws through
that system.
Moreover, this lack of outcomes from the system is in stark
contrast to the monetary compensation that private investors
can demand of governments under the investor rights rules in
CAFTA.
And let me now turn from the ways in which the
environmental provisions are lacking to the ways in which other
aspects of the agreement directly undercut environmental
protection. And I will focus here on the investor suit rules
found in chapter 10 of CAFTA. These are similar to NAFTA's
chapter 11, rules which have allowed foreign investors to
challenge environmental and public health standards before
international tribunals, bypassing domestic courts, and
providing rights that are nonexistent in the U.S. or in other
countries.
Under NAFTA, Mexico and Canada have already lost chapter-11
challenges to domestic environmental protections, and the U.S.
has spent millions of dollars defending itself against
environmentally related claims, totaling more than $1 billion.
With CAFTA, the threat of these challenges could chill the
further development of much-needed environmental standards,
especially, of course, for developing Central American
countries and the Dominican Republic.
During debate over the Trade Act of 2002, a mandate
requiring that trade agreements should give investors no
greater substantive rights than U.S. citizens have under U.S.
law was introduced into the requirements for USTR's
negotiations. Unfortunately, however, CAFTA would still provide
foreign investors with rights to challenge environmental
protections that go far beyond the rights in U.S. law.
Contrary to what Ms. Vargo said earlier, in revising the
investment rules, USTR cherry-picked a few legal standards from
a single Supreme Court case, taking those standards completely
out of context, and ignoring many key principles from U.S.
Constitutional Law, including some key principles from that
same Supreme Court case that she mentioned, Penn Central.
Let me conclude by saying that DR-CAFTA will have serious
impacts not only in Central America. It will set critical
parameters for broader U.S. trade policy, including regional
agreements such as the FTAA. Unfortunately, we believe that
this agreement sets our trade policy on a wrong and
unsustainable course for the environment.
[The prepared statement of David F. Waskow follows:]
Prepared Statement of David F. Waskow, Director of the International
Program, Friends of the Earth
Thank you for the opportunity to testify before the Subcommittee
today concerning the proposed Free Trade Agreement with five Central
American countries and the Dominican Republic (DR-CAFTA). Friends of
the Earth is a national environmental advocacy organization and a
member of Friends of the Earth International, the world's largest
grassroots environmental network, with more than one million members in
70 countries worldwide.
We believe that international trade and investment can and should
be supportive of environmental protection. However, this agreement's
lack of adequate environmental provisions threatens the environment and
public health in one of the world's most environmentally sensitive and
biologically rich regions. Moreover, DR-CAFTA would undermine hard-won
environmental protections by allowing foreign investors to challenge
environmental laws and regulations in all of the countries, including
the U.S., that are parties to the agreement. Because of DR-CAFTA's
negative implications for environmental protection, a wide range of
major U.S. environmental organizations, together with dozens of
environmental groups in Central America, oppose this agreement.
DR-CAFTA is an extremely important trade agreement in environmental
terms. My comments will focus on Central America, one of the most
biodiversity rich regions on the planet, with more than 8% of all
living species in the world. Four of the five Central American
countries included in DR-CAFTA have tropical areas identified as
``critical regions'' that require the protection of biodiversity. Three
out of four migratory bird routes in the Western Hemisphere pass
through the DR-CAFTA countries, making the forests in this tiny strip
of land an essential habitat for the survival of 225 species of birds.
In the midst of already fragile ecological zones, Central America
is battling with a wide range of environmental problems. Central
America has already lost more than 70% of its forest cover, and the
depletion of forests has led to increased soil erosion, the
deterioration of watersheds, and decreased biodiversity. Urban
pollution, including air pollution, low levels of sewage and solid
waste treatment, and chemical and pesticide runoff into water supplies,
are rampant.
Unfortunately, essential environmental protections are lacking in
much of the region. For instance, in its Environmental Review of the
agreement, USTR itself determined that Guatemala and Honduras are
lacking even the most basic environmental laws, such as protections for
water, forests, sanitation, and biodiversity. Most countries in the
region have disjointed and under funded policies that have led to
severe environmental degradation.
DR-CAFTA would only exacerbate the existing problems in the region
by opening Central America to substantial changes in industrial and
agricultural development, many of which would worsen the environmental
situation if left unregulated. Unfortunately, DR-CAFTA's environmental
provisions are inadequate, contain numerous loopholes, and would not
improve environmental protection.
DR-CAFTA does not mandate any country to adopt and maintain a set
of basic environmental laws and regulations, a serious omission given
the weak environmental standards currently existing in much of the
region. Only one environmental provision--that countries effectively
enforce their already existing laws--is subject to dispute settlement,
and the agreement fails to provide parity between enforcement of
commercial and environmental provisions, a clear step backward from the
U.S.-Jordan Free Trade Agreement.
The environmental provisions also contain numerous loopholes. For
instance, countries can evade the requirement to enforce their
environmental laws through an escape hatch that allows them to use
enforcement resources as they see fit. None of the agreement's
provisions apply to judicial decisions, even including repeated
failures by a country's court system to enforce environmental laws. And
the requirement that countries enforce their own laws does not apply to
any laws whose ``primary purpose'' is natural resource management, such
as a forestry management plan.
Given the numerous environmental challenges facing Central America,
DR-CAFTA ought to be accompanied by firm commitments to meet the
capacity building needs of these countries, backed up by a permanent,
dedicated and adequate source of new funding not taken from already
existing programs. Unfortunately, the agreement includes no such
funding. And the recently appended Environmental Cooperation Agreement
fails to ensure anything more than the establishment of a multi-agency
commission without even a required mandate for specific cooperative
activities to improve environmental protection.
In addition, although DR-CAFTA establishes a citizen submission
process to allege enforcement failures, it does not provide for any
clear outcomes or actions to actually ensure that citizens of the
region can achieve enforcement of environmental laws. In a step
backward from NAFTA, the secretariat charged with oversight of citizen
submissions is an economic institution with no environmental expertise.
Moreover, the citizen submission process' lack of enforcement tools
contrasts starkly with the monetary compensation that private investors
can demand of governments under DR-CAFTA's investor suit rules.
The investor suit rules, found in Chapter 10 of DR-CAFTA, pose a
substantial threat to environmental protection in all of the
agreement's participating countries. These investor suit rules are
similar to NAFTA's Chapter 11, which has allowed foreign investors to
challenge environmental and public health standards before
international tribunals, bypassing domestic courts. Using these rules,
which provide foreign investors broad rights that do not exist under
U.S. or other countries' laws, multinational investors have been able
to demand compensation for the implementation of legitimate
environmental protections.
Under NAFTA, Mexico and Canada have lost Chapter 11 challenges to
domestic environmental protections, and the U.S. has already spent
millions defending itself against claims totaling more than $1 billion.
The challenges thus far have involved a wide range of concerns,
including hazardous waste, toxic gasoline additives, mining remediation
measures, and food safety requirements, as well as many other public
interest protections.
With DR-CAFTA, the threat of these challenges could discourage the
further development of much needed environmental standards, especially
for developing Central American countries and the Dominican Republic.
Attempts to improve environmental standards in Central America could be
chilled by the impending threat of investor litigation before
international tribunals.
During debate over the Trade Act of 2002, many members of Congress,
including several on the Energy and Commerce Committee, raised
significant concerns about the provisions in NAFTA Chapter 11. The
Trade Act of 2002 requires that trade agreements give foreign investors
``no greater substantive rights'' than U.S. citizens have under U.S.
law. In introducing the relevant amendment, Senator Baucus instructed
USTR to place a ``ceiling'' on investor rights at the level of U.S.
law.
Unfortunately, however, DR-CAFTA would still provide foreign
investors with rights to challenge environmental protections that go
far beyond the rights provided under U.S. law. In its supposed fixes to
the agreement's investment provisions, USTR cherry picked a few legal
standards from a single Supreme Court case, taking those standards
completely out of context and ignoring many key principles from U.S.
Constitutional law.
The agreement continues to allow foreign investors to assert that
environmental laws have caused an ``indirect expropriation,'' or
regulatory taking, of their business interests or have violated a
``minimum standard of treatment'' in a wide range of circumstances that
would not be compensable in U.S. courts. For instance, the agreement
does not include the critical Supreme Court principle that a
governmental action must permanently interfere with a property in its
entirety in order to constitute a taking. Nor does DR-CAFTA ensure the
Constitutional principle that the government can regulate a public
nuisance--such as pollution released from a property--without
compensating the property owner.
In several critical respects, DR-CAFTA's investor suit rules also
provide investors rights greater than those found in NAFTA. DR-CAFTA
expands the definition of an ``investment'' to cover a wide variety of
economic interests that go far beyond what is considered property in
U.S. law regarding regulatory takings. The agreement also explicitly
grants foreign investors the right to challenge any aspect of
government decisions about natural resource agreements, such as federal
oil, gas, and mineral leases.
Finally, I would like to touch on two key additional concerns
regarding the agreement: agriculture and intellectual property. One of
DR-CAFTA's most significant impacts is likely to be the dumping of
subsidized U.S. agricultural products on Central America, a practice
that under NAFTA drove small-scale farmers off their land and
impoverished many others. In Mexico, this forced many small farmers to
clear-cut forest areas to provide increased farming opportunities or
replacement sources of income, while industrial farms have increased
the levels of nitrogen and other pollution. Under DR-CAFTA, impacts for
the millions of Central American small farmers whose livelihoods depend
on the agricultural sector are likely to be similarly harmful.
DR-CAFTA's intellectual property rules, which go beyond World Trade
Organization requirements, could threaten the region's biodiversity and
put the rights of small farmers and indigenous people at risk. By
requiring the patenting of a wide range of life forms, the agreement
creates potential conflicts with the Convention on Biological Diversity
and could limit the ability of small farmers to maintain traditional
practices, such as seed saving, which help protect and sustain
agricultural biodiversity. In addition, DR-CAFTA could impede efforts
to ensure that the origins of traditional community knowledge utilized
in seeds and medicinal treatments are fully acknowledged and
appropriately compensated.
Let me conclude by saying that DR-CAFTA will have serious impacts
not only in Central America. It will set critical parameters for
broader U.S. trade policy, including regional agreements such as the
Free Trade Area of the Americas (FTAA). Unfortunately, we believe this
agreement sets our trade policy on a wrong and unsustainable course for
the environment.
Mr. Stearns. I thank the gentleman. And I will start with
my questions for the third panel. Mr. Roney, I think you heard
Mr. Roberts. Is there anything you would like to--because he is
saying that pretty much this agreement, the only person that is
sort of on the outs on this agreement is the sugar industry.
And the implication is also that under this agreement, that
sugar would get a better deal than they are now getting. So you
might want to reply to what he is indicating that why you
wouldn't be better off with this agreement, and really,
considering you are the only one, I think Mr. Roberts is saying
you have had inordinate persuasion on this bill. Is that what
your words were, something to that effect that there has been--
considering there is only 60,000 employees, you said, of the
sugar industry, that the sugar industry has had a pretty much a
vocal opposition to it. And so Mr. Roney, I would give you an
opportunity to answer.
Mr. Roney. Thank you very much, Mr. Chairman. I do
appreciate that because I think the professor is very right
about baseball but he is very wrong about sugar in quite a
number of areas.
In terms of our holding the agreement hostage, it is quite
the other way around. We are being held hostage by it. It is
wrenching open our market without adjusting any foreign
subsidies. And in terms of the opposition to the CAFTA, it is
extremely widespread. Polls show the majority of Americans
oppose it. The labor and environmental movements that you have
heard from today are opposed to it. A broad range of religious,
human rights groups here and in the Central American countries
are opposed to it, as is much of American agriculture, contrary
to what we have heard earlier. There are quite a number of
large U.S. agricultural groups who are opposed to it.
The professor is also wrong about our competitiveness. We
are among the most competitive producers in the world. Our beet
sugar producers are the third most competitive out of 41
countries, and our cane producers are 26 most competitive out
of 64 countries, despite the fact that we are facing much, much
higher labor and environmental standards than other countries.
And the other most egregious area was on consumer prices
for sugar in this country. And there is quite a bit of
information on this in my full testimony, which I will
recommend to Dr. Roberts because what we have shown is that the
foreign consumer prices for sugar are 30 percent higher than
here. And then in terms of affordability, sugar is more----
Mr. Stearns. When you say foreign, you mean European or
Latin American?
Mr. Roney. The work that we have done focuses in actual
prices in developed countries. Abroad, it is the developed
country average----
Mr. Stearns. Okay.
Mr. Roney. [continuing] is 30 percent higher----
Mr. Stearns. Okay.
Mr. Roney. [continuing] and then globally taking various
per capita incomes into account in terms of minutes of work
required to buy a pound of sugar. And there are charts in here
that demonstrate this. Our sugar is the most affordable in the
world.
Mr. Stearns. Mr. Waskow, you know, the argument seems
pretty strong that this agreement is only worth about $77
billion, or about the GDP of Sacramento, California. And
relative in the big scheme of things, you know, we are saying
don't support a fast-track agreement for a very small number of
agreements. I mean, relative--and then it was also pointed out
by Mr. Murphy when he indicated that the best is often the
enemy of the good. I mean, couldn't this agreement--you can't
get a perfect agreement, but certainly with such a small number
of nations, wouldn't it just be goodwill to go ahead and try
and move forward, realizing that the best is not the enemy of
good and perhaps we can perfect it as we go?
Mr. Waskow. Well, if we thought that this agreement on net
were going to be positive for the environment and Central
America and the United States, I would perhaps say yes----
Mr. Stearns. But remember, you----
Mr. Waskow. [continuing] but----
Mr. Stearns. [continuing] cannot influence anybody if you
don't have a dialog and you don't trade with them. And right
now they are getting a free ticket in here but we don't get a
free ticket into theirs. So wouldn't we be able to influence
them a little bit if we had a trade agreement and they were
buying more of our products and just the set up that the trade
organization has set up here in the CAFTA agreement? Wouldn't
that be some kind of influence to get a better environmental
situation than we now have?
Mr. Waskow. Well, I would just draw on the lessons that
many of our colleagues in Central America have come to, and
that is that this agreement is bad for environment and
development in Central America. It will not provide benefits in
a substantial way to the economy given as Ms. Vargo herself
said, that market access to the U.S. economy is almost as great
now under CBI as it would be under CAFTA. Perhaps selling
products there would somehow benefit the environment, but in
fact I think the likelier outcome is that selling--and this is
a controversial question, of course--but our selling highly
subsidized agricultural products to Central America could have
a quite problematic effect for the environment.
We have seen with NAFTA that the subsidized dumping of corn
into Mexico has displaced many small farmers, and
unfortunately, what that has led to is increased deforestation
rates as those farmers try to supplement their incomes or to
clear additional agricultural land when they are impoverished.
So in fact what our colleagues have determined is that this
will not be a beneficial agreement for their environment or
development.
Mr. Stearns. Dr. Roberts, you have your Ph.D. in economics
and----
Mr. Roberts. Yes.
Mr. Stearns. [continuing] in the opening statement I talked
about Ricardo and his comparative advantage----
Mr. Roberts. Was a thrill for me----
Mr. Stearns. Yes.
Mr. Roberts. --Mr. Stearns----
Mr. Stearns. Okay.
Mr. Roberts. [continuing] I have to tell you.
Mr. Stearns. And so I went to my staff and I said well,
didn't Adam Smith and the ``Wealth of Nations,'' didn't he come
up with this concept before Ricardo? And I guess he talked
about free trade in his ``Wealth of Nations.'' Which one is it
from an academic standpoint is considered the one, the free-
marketer in terms of comparative advantage?
Mr. Roberts. Well, Adam Smith really was talking about what
is usually called absolute advantage, and he was emphasizing
the fact that even if we are all alike, there are values to
specialization. I don't want to do everything for myself. I am
going to rely on you and cooperate with you via trade, and if
we have the same skills. That was Smith's deep insight as to
how that creates wealth. Trade and exchange and relying on
others, cooperating with others, which is what trade is all
about, creates wealth.
But there is another aspect to trade, which is diversity,
which is the fact that you and I may not be the same. You may
have certain things you are good at and certain things I am
going to be better at than you. And what Ricardo's great
insight was was that even if I am better at everything than you
are--or let us reverse it--even if you are better at everything
than I am, it still is worthwhile for you to trade with me. I
will benefit even though you are better than I am at
everything, because by specializing, you will be able to do--
use your resources, your time, your energy much more
effectively. That was Ricardo's deepest insight was that when
we are different, even if I am bad at everything, by letting
you specialize and letting me do some things for you, you will
be better off and I will be better off.
So for example, even if you are the best typist in the
world or the greatest lawn cutter in the world, you might
outsource those jobs outside your household. You might rely on
others to do those jobs. You might let someone cut your lawn,
someone do your typing, someone to change the oil in your car,
even if you were phenomenal at it, because that will free up
your time to do something you are even better at. And that is
really what Ricardo's insight was. It is not intuitive, and I
would suggest that it has not quite made its way fully into the
consciousness----
Mr. Stearns. And I----
Mr. Roberts. [continuing] of the American people.
Mr. Stearns. [continuing] appreciate your definition, and I
think going--when I asked a question to Mr. Waskow, that when
this happens in this dialog with this other country, you
actually influence them and they influence you. And there is a
modicum of cross-the-board influence.
Mr. Roberts. And you change the way that you organize your
economic life and you change the way you organize your
political life. And I think the political impact is extremely
important for these countries that have struggling democracies.
Mr. Stearns. And let me ask you one other question. My time
has expired. I hear lots of times that the deficit, the trade
deficit is bad.
Mr. Roberts. Yes.
Mr. Stearns. And I think the arguments are made before
NAFTA we had a surplus, and after NAFTA we had huge deficits
even though NAFTA contributes a smaller portion. And Mr. Brown
from Ohio has a graph he shows----
Mr. Roberts. Chromatic chart, yes.
Mr. Stearns. [continuing] and how do deficits--trade
deficits affect our economy and what does that mean? Should we,
as Congressmen, be concerned that this might add to the trade
deficit, this CAFTA agreement?
Mr. Roberts. Well, no economist who is not under the pay of
a special interest. That is, virtually every academic economist
thinks that trade deficits are relatively unimportant for the
economy and for the job picture in the United States, which is
counterintuitive. It is not what you will hear from a lot of
lobbyists and special interest----
Mr. Stearns. Because people are arguing that is why the
dollar has gone relative to the European Union. But the
European Union has high unemployment, they have deficits
themselves, they----
Mr. Roberts. Well, yes----
Mr. Stearns. [continuing] so I just----
Mr. Roberts. [continuing] Well, to make it simple what a
trade deficit is mirrored by is a capital surplus; that is, a
trade deficit means we import more from our neighbors than they
import from us. At the same time they are investing more in our
economy than we are investing their. Why is that? Because we
are a phenomenal place to invest and a great place to take risk
relative to the rest of the world. As long as that is true, as
long as the United States is a productive and stable
environment for investment, we will run a trade deficit year
in, year out, maybe with some countries and not with others,
but our net trade deficit will be negative in goods. And that
will be a sign of economic health----
Mr. Stearns. So trade deficit----
Mr. Roberts. [continuing] one----
Mr. Stearns. [continuing] in your opinion is----
Mr. Roberts. Irrelevant.
Mr. Stearns. [continuing] is a positive sign?
Mr. Roberts. Irrelevant or positive. One last statistic,
since the mid-'70's we have run a trade deficit every single
year. It adds up to trillions of dollars. These numbers we hear
about how many jobs are lost for every $1 billion of trade
deficit or jobs that are created for surplus, those numbers are
meaningless; they are not true. It would require us to have
created something like--by the way, since those mid-'70's our
economy has created 50 million jobs in the face of those trade
deficits. So the proponents who tell us that trade deficits
hurt jobs, they suggested we would have created an extra 20 or
30 million jobs. Where would they come from? Who would be drawn
into the labor force? Children? 80-year-olds? The job market,
the labor market, the number of jobs in the United States is
determined by our skills and our willingness to work, not by
our trade deficit per se. Totally irrelevant.
Mr. Stearns. If you go back in history and you look at the
start of this country in the 18th century and the 19th century,
what were the trade deficits back then?
Mr. Roberts. Well, when we were getting investment, we were
running a trade deficit, but a more dramatic example is
England, from 1850 to 1970, which is 120 years, which were
glorious years of economic history for England, by the way----
Mr. Stearns. Those were the golden years of England.
Mr. Roberts. Mostly time of tremendous economic growth,
tremendous job growth, they ran a trade deficit 119 of the 120
years. So we will hear it is not sustainable. That is pretty
sustainable. 119 out of 120 years, 1 year, I don't know what
was wrong with that year. I suspect it was a data error entry,
a typo on the chart, but for 119 out of 120 years when England
was the most powerful economy in the world, they consistently
ran a trade deficit because they were a good place to invest.
That will be true for the United States as well.
Mr. Stearns. And my time has expired.
Ms. Schakowsky. England was also a colonial power that
enslaved entire nations at the time. I just wanted to point
that out.
Mr. Roberts. They had some negatives. That is true.
Ms. Schakowsky. I just thought I would----
Mr. Roberts. Big ones.
Ms. Schakowsky. [continuing] point that out. Yes. I wanted
to say something to ask a question of Mr. Murphy. Your
organization and the Chamber of Commerce have been citing a
study that was sponsored by the Chamber that you say
demonstrates that CAFTA would increase U.S. employment and
increase income nationally. There are a couple things about the
report that I wanted to ask you, which in fact is the only
economic modeling that we have seen that tries to show that the
U.S. would gain jobs from CAFTA.
I want to you ask you, does it seem like a reasonable
assumption that under CAFTA the United States would not see any
increase in imports from Central America? Because that is one
of the assumptions of the study.
Mr. Murphy. The study is based on a model that has been
around for a long time. It is called a RIMS-II study. It is
widely use at the Department of Commerce and other places. The
model--basically you come up with certain assumptions. For
instance, we started by making some very conservative
assumptions about export growth from the United States to the
region. We took what we saw last year with the Chile agreement
of 33 percent export growth and we cut it in half and we
posited out what that would mean using multipliers that the
government provides for different sectors. You know, if you
have $1 billion of exports, what does that mean in terms of job
creation in the computer sector in a different industrial
sector.
And that is the State-by-State studies that we have been
doing, and some of the numbers are quite impressive, for
instance, for Florida, which has very large trade with the
region. We did not explore the import side for the reasons that
have been discussed quite broadly here today, that the U.S.
economy has essentially already paid the price for opening up
our economy to imports from this region. The fact that 99
percent of agricultural goods are already coming in duty-free,
we don't expect to see a huge surge in agricultural goods. The
fact that 80 percent of manufactured goods come in duty-free,
that we don't expect to see a huge surge in that category.
Whereas in the other direction, the tariffs are quite high.
Ms. Schakowsky. So you don't think that figuring in
imports--you think there will--so you are saying there will be
no increased imports?
Mr. Murphy. I think that as economic growth proceeds, there
are increases in imports, but for the purposes of the study,
projecting that out, we looked at the export side. But I
think----
Ms. Schakowsky. So they weren't necessarily net exports, I
mean, in terms of impact on the economy?
Mr. Murphy. Yes. But I think one of the important things
you have to say about imports is that one shouldn't look at
imports as a net negative. After all, look at the Chile
agreement, one of the----
Ms. Schakowsky. No, I am just saying they weren't really
considered at all.
Mr. Murphy. Right, precisely because we expect it to be
quite a low number, an extremely low number given how open the
U.S. economy already is----
Ms. Schakowsky. Our staff----
Mr. Murphy. [continuing] across the----
Ms. Schakowsky. [continuing] ran some numbers on the export
side, and what they found was that in order for CAFTA to create
jobs in the United States, to actually make progress in job
creation, if you look, just for example, at Honduras, you would
have to assume export gains for U.S. companies and farmers to
essentially have 80 percent of the Honduran economy absorbed by
the United States exports in 10 years. I mean, just enormous
amount of exports that it would amount in figures to 80 percent
of the Honduran economy.
I mean, do you think it is realistic to think that we could
displace 80 percent of another country's economy in terms of
money that we would gain?
Mr. Murphy. I think that if you look at the statistics on
what the U.S. already sells to this region, it is remarkable
what great customers they are. I think it is about 70 percent
of the non-oil imports that go to these countries is coming
from the United States. And as we see these economies grow, we
expect those numbers to continue also to grow a great deal. Now
I can't speak very specifically to your analysis. I would be
very happy to look at it.
Ms. Schakowsky. Okay, that would be good. I would
appreciate that. I wanted to ask a question briefly about the
environment and my concern about questions of U.S. sovereignty
and our ability to even enforce our own environmental laws. I
wonder if you could expand a little bit on that.
Mr. Waskow. Sure. And in fact groups ranging from the
National League of Cities to the Conference of State Chief
Justices have raised significant concerns about the investor
suit rules in these agreements I think it is coming from a
whole array, including a bipartisan array, of local and State-
elected officials around the United States.
And, in essence, what the concern is is that these rules
provide a tool for foreign investors to essentially challenge
and undermine legitimate environmental--and frankly, not just
environmental, other public interest standards as well by
demanding compensation from the U.S. Government when the
foreign investors claim that their business interests have been
affected in some manner.
And what this does is essentially place significant
pressure on State and local governments. And we have seen just
recently Governor Schwarzenegger veto a bill that would have
required recycling of crumb rubber in California for road use
because of concerns about the effect of NAFTA and whether NAFTA
would in fact overrule the attempt to do that recycling. And so
I think that it is quite a well-placed concern on the part of
those State and local officials.
Ms. Schakowsky. Thank you. And thank you for that example
as well.
Mr. Stearns. Mr. Otter.
Mr. Otter. Thank you, Mr. Chairman. Mr. Roney, the
administration has insisted that there is a cushion that
permits them to grant the CAFTA countries additional access to
the U.S. sugar market without interfering with the operation of
U.S. sugar policy. And you say that there is no such cushion.
Can you explain the difference between your position and the
administration's position?
Mr. Roney. Yes, I can. Thank you, Congressman. The
administration seems to have a peculiar case of selective
amnesia about what it has already committed to do in the NAFTA.
But in the NAFTA the administration added to commitments that
it had already made in previous trade--in the Uruguay Round of
the WTO. It added a commitment to import up to a quarter
million tons of sugar from Mexico when Mexico has that sugar to
export, regardless of whether we need the sugar or not. That is
on top of the one and a quarter million tons that we are
committed to import from 41 countries on the WTO.
Now, what has happened in the last couple years is that
Mexico has had a couple of short sugar crops and has not had
the sugar available to send to us. And so our actual imports
were coming in below this one and a half million tons that the
Congress essentially decided in the 2002 Farm Bill was an
adequate amount of access guaranteed to foreign countries.
And the administration looked at the sugar that was not
being imported from Mexico and said oh, well, this gives us
room or a cushion to grant additional access to the CAFTA
countries, completely forgetting that Mexico could, any month
now, resume shipping that sugar to us. And indeed this year
Mexican sugar crop is coming back substantially, and we would
not be surprised in the coming year if they didn't send us the
full amount that they are allowed to.
Mr. Otter. Which is 276,000 tons?
Mr. Roney. Exactly, yes. And----
Mr. Otter. You feel confident that they will then use their
full quota to come back into the United States?
Mr. Roney. I would expect that they would----
Mr. Otter. Then what happens in 2008 with Mexico?
Mr. Roney. In 2008 it gets even worse because then the
276,000-ton limit comes off. We have free trade with Mexico.
Mexico, beginning in 2008, if they wanted to, could send us all
their sugar production and import off the world dump market to
satisfy their domestic needs. That is a train wreck that is on
the way, and we are trying to work out negotiation with Mexico
to avoid that. The CAFTA will just make that worse.
Mr. Otter. Are you familiar with their policy of importing
sugar into Mexico, but not allowing any of that imported sugar
to go into value-added products such as candy bars, cake mixes,
and those kind of things unless it is going to be exported?
Mr. Roney. Yes, that is through a re-export program set up
by Mexico and by the U.S.
Mr. Otter. And, of course, we are going to continue with
that program?
Mr. Roney. We would expect so, yes.
Mr. Otter. What is the world sugar price right now?
Mr. Roney. About 9 cents per pound.
Mr. Otter. Now, 2 years ago I was in Cuba and visiting with
Castro with the Cuban government, and he just indicated they
had shut down 78 sugar plants. I said, well, that was a very
capitalistic move. Why did you do that? He said well, because I
can buy sugar on 3 cents and it costs me 4.5 cents to produce
it. And I said again to him, well, that was a very capitalistic
move. He said I can get all the sugar I want for 3 cents. So
why would that 3-cent sugar go to anyplace else in the world
except the United States if we opened our markets?
Mr. Roney. Well, that is the problem, Congressman, is that
there is a lot of this dump-market sugar floating around out
there. No one in the world, and I think Mr. Castro was dreaming
when he said they could produce sugar for as low as 4.5 cents
per pound. They have an antiquated sugar industry there. With
cost of production they are probably doubled.
Mr. Otter. Yes, but they also have slave labor.
Mr. Roney. They have that. They have got some low labor
costs and antiquated equipment and probably very high----
Mr. Otter. Actually, it is not slave labor. It is all
government employees.
Mr. Roney. Yes, and----
Mr. Otter. So there is a difference. Mr. Roberts, I am
interested in your economic--I remember when I was taking
economics, I think it was Economics 101 back in college, and my
college professor said one time, who was a real free market
advocate, not unlike, say, a Friedrich Hayek or Milton
Friedman--anyway, he said that, you know, if every government
economist were laid end to end, it would probably be a good
idea. I am not sure I totally agree with that, but I would say
it is not unusual for us to constantly be bombarded with
conflicts between government economists and free market
economists. Tell me why that is.
Mr. Roberts. Well, first, again, I have to say that to have
a hearing with David Ricardo, Adam Smith, Friedrich Hayek, and
Milton Friedman's name mentioned, is it a first or is this
commonplace?
Mr. Otter. I hope it is not the last.
Mr. Roberts. Okay. It is an interesting world that we live
in. There is a lot of disagreement in economics about lots of
things. There are a lot of issues about how big certain effects
are. Some effects I might think are large; someone else might
say no, they are small. So economists disagree about a lot of
things, but there are many things that economists actually
agree on. One of them is about the benefits of trade for both
parties. And the people who are against trade, who put the
label economist on their business card, tend to be economists
who are paid for their positions rather than people who are
free, either because they are in the academic----
Mr. Otter. Wait a minute. You mean they are free because
they are government employees?
Mr. Roberts. No, I am not talking about government
economists.
Mr. Otter. Oh.
Mr. Roberts. I am talking about people you will hear
representing various industry groups, various labor unions,
people who are paid to take a position basically. Those are the
people you will hear day in, day out. They will come through
your office to tell you about how dangerous trade is and how
bad trade deficits are.
But the economists who are disinterested, free trade and
otherwise, on the left and the right, Democrat and Republican,
overwhelmingly agree that trade is good for both sides and that
trade deficits do not cost us jobs. The people who you were
hearing are, I would argue, not a representative sample of the
economics profession. The other side, the so-called free
marketers, include Democrats, Republicans, people across the
ideological spectrum. But they are not in the employ of special
interest.
Mr. Otter. My time is up. And, Mr. Chairman, thank you. I
would only--I need your answers because I have got 14,000
lumber workers that are out of business because of Canadian
Softwood Lumber Agreement. I really need to be able to convince
them that they are better off----
Mr. Roberts. Well----
Mr. Otter. [continuing] now because of NAFTA.
Mr. Roberts. Well, not everybody is going to be better off.
I mean, no economist has ever said that. The question is, who
is going to benefit at whose expense. And the sugar beet
farmers that you are worried about, and I understand your
worry, are taking money out of my pocket right now. And this
agreement will keep that money flowing into their pocket. And I
understand that they are going to tell you how bad it is for
their livelihood that CAFTA is going to pass and increase U.S.
imports by 2 percent over 15 years. The fact of the matter is
that is making me pay more for my sugar, for my cereal, for my
candy, my ketchup, et cetera.
And I understand your self-interest. You have got to
protect those jobs. But the overall, people who are paying for
that are the rest of the country.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman. The gentleman from
Ohio.
Mr. Brown. Thank you, Mr. Chairman. I would like to tell an
anecdote, a story, and then a question. The anecdote, before we
go too far about Adam Smith, you should remember that Adam
Smith's last job before his death was a tariff collector in
Scotland. And I also would add to Dr. Roberts that Paul
Samuelson, who was probably not on any industry payroll, has
written a paper that he was generally wrong on free trade all
these years. And that to say that no reputable economist--I
mean, there are dozens of reputable economists that don't agree
with your position on trade. But that is neither here nor
there.
A couple of guys from my staff, both are sitting behind me,
toured a big steel problem last month in Baltimore I believe.
And they told a story that bears on what we are talking about.
I would like to tell the story and then ask each of you just to
respond to a question, all four of you. They were taking a bus
ride from one plant to another, and across the aisle on the bus
was the plant manager talking to another guy about their
environmental protection efforts. The plant manager said--and
this is a pretty direct quote from the two people in my staff
that listened--he said yes, it is a big investment. We just
spent $23 million to improve our water emissions, we spent $43
million to improve our air emissions. And he said that is okay,
though, because we all live here too and we want this area to
be safe for our kids. And then he paused and he said I just
wish that other countries had to play by the same rules, that
is all.
That is the point that a lot of us have made on this trade
agreement by holding foreign countries to lower or nonexistent
environmental standards. Trade agreements like CAFTA not only
harm the environment, they harm our competitiveness. How do you
compete with that?
And my questions are for each of the four of you, starting
with you, Mr. Roney. Is that plant manager right and should we
insist on a level playing field for environmental protections
as well as intellectual property and commercial protection?
Mr. Roney. Yes, sir. We certainly should, and in farming it
is very apparent. I had a mill manager in Hawaii who had worked
in other mills in the developing world before he got there and
said that he was facing rules in Hawaii that he had never faced
in any other country in terms of cleaning the water, the muddy
water that left the mills before it could go out into the
ocean. He had to invent machinery that had never been made
anywhere else in the world just to get the mud out of the water
before it went in.
Now, should we be put out of business by the countries that
don't protect the water supply by the El Salvador industry? It
employs child labor that is well-documented. Should we be put
out of business while we are adhering to the highest labor and
environmental standards in the world and these other countries
continue? I am a recovering free trade economist because I have
seen how the real world works. I see how governments play roles
that--directly subsidizing or indirectly subsidizing by not
putting labor and environmental standards on their workers and
disadvantaging those countries that do care about those things.
Mr. Brown. Dr. Roberts.
Mr. Roberts. Yes, I am glad to add Paul Samuelson to the
illustrious list of economist who have been mentioned today and
would love to see--if you would please send me that paper, I
would be anxious to see it.
On the comment on the steel workers and the steel industry,
we do have different standards than the rest of the world, but,
of course, many U.S. steel producers compete very effectively
with those standards in place. The mini-mills, for example,
through innovation and technological creativity were able to be
competitive with the rest of the world. Unfortunately, the
large steel mills----
Mr. Brown. The question is not about the steel mills; the
question is should Central American countries have the same
environmental standards as we do----
Mr. Roberts. I think not. I think not because we would
impoverish them if we did. The reason they don't have the same
standards we do is because they are much poorer than we are and
they can't afford the same standards that we do. To impose
those standards on them is to keep them poor. And I think that
is a cruel policy. And I think we can compete in the face of
that disparate regulatory environment as the mini-mills have
shown we can do. So I think it would be a mistake to force them
to live by our standards.
Mr. Brown. Mr. Murphy.
Mr. Murphy. I think one of the interesting ways to look at
the choice that the Congress faces is to think about the
different outcomes if DR-CAFTA is approved or rejected. If the
agreement is rejected, and I think this goes to the question
here, it is American businesses and workers and farmers who
will continue to face these high barriers to their exports
while the Central Americans will not. It is interesting to look
at the working conditions of the workers in Central America.
What incentive would the governments have to improve their
working conditions? To say nothing of the fact that increased
competition in the global economy, especially in the apparel
and textile industry, is only going to increase. And without
CAFTA they will have even fewer resources and a lessened
ability to stay competitive and hold onto the markets that they
have. I do think that there is a clear fork in the road there.
Mr. Brown. Mr. Waskow, if you would answer also. Thank you.
Mr. Waskow. Sure. Well, let me begin by saying that I think
from the perspective of our colleagues in Central America, the
cruelty--cruelty was just referred to--the cruelty would be for
citizens in those countries to continue to face serious water
and air pollution, to see their forests deforested, to see
small sustainable farmers pushed off their lands. That is the
cruelty from the perspective of our colleagues.
And I think one of the great ironies in this agreement is
the fact that the investor suit rules give companies, foreign
companies, an opportunity to essentially place a lid on the
standards to which those countries can aspire. Because a
country, if it senses a threat of a lawsuit from a foreign
investor under these rules before an international tribunal, it
is quite unlikely, when they know that millions of dollars in
defense costs would be involved and possible compensation paid,
even greater amounts, that country, I think, is quite unlikely
to be ready at a moment's notice to go forward with
environmental standards. And so what I think we see with this
agreement in fact is an imposed cruelty because the investor
suit standards cap what it is that Central Americans can do for
their environment.
Mr. Stearns. Thank you. Mr. Gonzalez.
Mr. Gonzalez. Thank you, Mr. Chairman. And the first
question will go to Dr. Roberts. And I think what we are always
discussing, and I think, in essence, I agree with some of the
theories; it is just that the practice can be brutal. The thing
about creative destruction, it just depends if you are part of
that that is being created or that segment that is being
destroyed at any given point. But it doesn't mean that things
get paralyzed either. We stay in the same place. And those are
really hard choices. Like I said earlier, in Texas we always
just say it depends whose ox is being gored. And that is, as we
can see through the testimony, generally that is what is
happening.
I was at a meeting about a month ago at the Greater Houston
Partnership, and Dr. Ray Perryman was there. And you are
familiar with Dr. Perryman, I believe? You are not? Well, in
Texas we don't do anything unless there is an economic study by
Dr. Perryman. And so what I asked him was, in the context of
free trade agreements, and specifically CAFTA, how much can we
realistically accomplish in the way of human rights, workers'
rights, and the environment? His answer was really very little.
Very little if you don't take into consideration where they are
in their economic development. And what he was basically
telling me--and I don't want to put words in Dr. Perryman's
mouth--was, you know, you guys need to get realistic about how
much you can accomplish. Because at one time in our history we
had child labor.
Mr. Roberts. Sure.
Mr. Gonzalez. And we didn't have 40-hour weeks. And we
polluted the heck out of the air and the water. And if you want
to impose these certain conditions on emerging, developing
economies, you are crippling them. So you are going to have to
be reasonable when you go out there and recognize the
realities. Now do you agree with that kind of general
assessment of Dr. Perryman?
Mr. Roberts. I do. I think the first thing to say though is
on the creative destruction point, it is easy to forget how
dynamic our economy is. Every quarter, every 3 months, the U.S.
economy destroys about eight million jobs for a thousand
reasons: companies that take a wrong turn, consumers decide
they don't want to buy something, they want low-carb instead of
high-fat, trade issues, innovation, productivity changes. Eight
million jobs a quarter. But we create about eight million jobs
a quarter. When the economy is going well we create more than
we destroy.
So that incredible dynamism is really the source of our
prosperity and to me gives me a great deal of optimism about
our ability to deal with changes that we are talking about or
many of the industries we are talking about are very, very
small relative to the size of the whole economy.
On the environmental issue I think you are exactly right.
When I was in Costa Rica, an incredible awareness there that
their future lies with their environment. It is a gorgeous
country. They have rainforest, they have beautiful beaches.
They want to see tourism, and do see tourism as a tremendous
source of their prosperity. They want to protect their
environment, but they are very poor. And I think it is very
arrogant on our part to try to tell them the pace at which they
will make the transformation to what we hope will be a
healthier and richer society.
They are a democracy. They are desperately trying to become
a successful economy, make an incredible set of transitions
that we have already dealt with both environmentally, both in
the job market. You know, 25 years ago their main crops were
coffee and bananas. And now tourism is probably their--I don't
know if it is for sure their No. 1 export, but I know coffee
and bananas are no longer as important as they used to be.
So they understand the world is changing. They are
desperately trying to make it happen, and we can't dictate to
them what pace they follow, just like we wouldn't like anyone
to dictate to us.
Mr. Gonzalez. Mr. Waskow. And I----
Mr. Waskow. Thank you for the opportunity.
Mr. Gonzalez. Sure.
Mr. Waskow. I think all the evidence to date is that there
is really no fundamental conflict between environmental
protection and development. In fact countries can benefit
themselves--I think Costa Rica is an excellent example--by
protecting their environment, that that provides great economic
benefit.
I would also add that I agree in a sense that we should not
be dictating standards across the board. Unfortunately, I think
that the investor suit provisions in the CAFTA agreement do
dictate and do place a lid on the kind of environmental
protections that countries can seek to put in place. And so I
think that is the dictation that is going on if you look at
CAFTA, all the chapters in CAFTA.
Mr. Gonzalez. And I have 19 seconds. And each one of you,
your own read, because you always hear that NAFTA was a
profound failure. I am from Texas, and I have to tell you that
it hasn't been in the State of Texas. And I am taking into
consideration what has been going on in Mexico and such.
Was NAFTA a good agreement? And I just--Mr. Roney?
Mr. Roney. It has been bad for us, Congressman, because it
is forcing us to take Mexican sugar and the Mexican sugar
industry is half-owned by the government. So this isn't exactly
free trade here. Rather than letting their mills go out of
business, the government just expropriates them. And now they
are trying to send--they want to be able to send us their
surplus. And the NAFTA will allow them to. So it has been a bad
agreement for us.
Mr. Gonzalez. Dr. Roberts.
Mr. Roberts. Well, your State is one of the few States
where you can see the benefits. We all see the costs. We have
heard from Representative Brown; we heard from others earlier
about how their State lost a certain number of jobs to NAFTA.
What we didn't see--they are there. We can't see the jobs that
are created because they are not created specifically in NAFTA
industries. But when we import stuff that is cheaper, that
frees up resources for us to do other things. Those other
things that expand and create more jobs, you are not going to
be able to identify them as NAFTA jobs. Surely every State that
complained about job losses due to NAFTA has increased
employment since NAFTA passed. And I think much of that--some
of that, not much--a part of that was due to NAFTA; you just
can't identify it.
So I think attempts to vilify NAFTA on the job issue are
wrong. It didn't create jobs per se; it changed the kind of
jobs we did. I think that is good for us, good for Mexico, and
the stability of the Mexican democracy I think is the single
most important result from that. It is not totally stable
obviously. It is not as stable as the United States. But it is
much more stable than it was 15 years ago. And I think that is
extremely important for us and for them.
Mr. Gonzalez. Mr. Murphy.
Mr. Murphy. I think for the United States NAFTA has clearly
been a gain. As has been pointed out, you can't see it
everywhere because the gains are so broadly distributed. And
yet at the same time you look at the past 10 years, we have had
a net creation of nearly 20 million jobs in this country.
Incomes are rising, not incredibly quickly, but they are
rising.
If you look at Mexico, though, it is a country very close
to my heart. I lived there for a couple of years. I am struck
by basic statistics like seeing the consumption of chicken has
doubled in the past decade, the average consumption of chicken.
The consumption of pork is up 50 percent. You are beginning to
see people start to live better. Mexico came into NAFTA with
tremendous rural poverty, and there is still tremendous rural
poverty. But you are starting to see changes there, and it is
very heartening.
Mr. Gonzalez. Mr. Waskow.
Mr. Waskow. I would say there are some marginal benefits,
but in general it has been a negative. Continued problems at
the borders I am sure you are aware, deforestation and other
problems due to major shifts in the agricultural sector in
Mexico, and the significant legal and regulatory issues that
have been raised by the investor suit rules and other
provisions in NAFTA.
Mr. Gonzalez. Thank you very much. Thank you, Mr. Chairman.
Mr. Stearns. Thank you. And we are getting ready to close.
I am just going to take the liberty, Dr. Roberts, just to talk
to you a little bit more about economics, and you know this
better than I do. But there are cases when you--at least Adam
Smith in ``Wealth of Nations'' as I recollect said there is a
reason for tariffs. And as I recollect, the three he mentioned
was obviously for national security, the second one is to
retaliate against those suppliers that flood the market
illegally either with the snap-back provisions, and the third
is to allow a transition time for those workers who are being
replaced so that they can be educated so that they are not
thrown out of work and they just sit there with no job. So he
mentioned those three in ``Wealth of Nations'' as I recollect.
Do you think there is any other reasons to oppose free trade
with tariffs other than those three?
Mr. Roberts. Well, in those particular cases, I think he
also mentioned--I would be happy to send you the quotes
online--he also mentioned the danger of using those arguments
because they would likely become abused by the political
process as special interests invoke those arguments. I think
most economists recognize those as potentially good arguments
but understand that in practice they often are exploited.
So for example, I think the steel industry for about the
last 120 years has been saying they need just a little more
time to adjust to foreign competition. I think it is about time
to let them try to stand on their own feet.
In the case of transition, I think the thing that CAFTA
does that is generally good is it would be cruel to someone who
has had protection to say overnight it is gone. It is important
to phase those in slowly, those tariff reductions. I think in
that case it makes sense.
Those are the main arguments. On the case of national
security I think it is the strongest case. There are very few
products in today's world where national security is truly a
legitimate issue----
Mr. Stearns. Do you think----
Mr. Roberts. [continuing] on trade protection.
Mr. Stearns. [continuing] having this country be able to
have its own agricultural sector is a national security and a
reason----
Mr. Roberts. I don't----
Mr. Stearns. [continuing] for Americans----
Mr. Roberts. I don't think so. I think our agricultural
policy with respect to tariffs and quotas--with all due respect
to the gentleman on my right--makes no sense. There are many,
many products that we do not have tariffs and protection for.
Because we buy them from lots of places that compete with each
other, there is no risk that we will be exploited by an enemy.
And somehow those products arrive at our groceries in great
abundance even though they are not subsidized, even though they
are not protected, even though they are not taken care of by a
government policy. Self-interest on the part of farmers and
consumers makes sure that those products are there in great
abundance. So I don't see any reason of why we have to worry
about that as a national security issue.
Mr. Stearns. Okay. Well, I am going to close the hearing
and thank all of you. I think the debate today has clearly
demonstrated the complexities of trade agreements, and we have
seen the pros and cons. And I really encourage my members of
the subcommittee to come here objectively to try and get to the
facts and not try to look at this relative to any political
things. And I think all of you have helped us. I also believe
that the United States must be a leader in economic progress,
and to a certain extent, the United States has its obligation.
So with that, thank you for waiting through the other two
panels. And at this, the subcommittee is adjourned.
[Whereupon, at 3:36 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of the Retail Industry Leaders Association
On behalf of the Retail Industry Leaders Association, we welcome
the opportunity to submit written comments for the record for this
important hearing on the United States-Dominican Republic-Central
American Free Trade Agreement (DR-CAFTA), now coming before the
Congress for implementation. We strongly support the DR-CAFTA agreement
and urge swift Congressional passage of the implementing legislation.
By way of background, the Retail Industry Leaders Association
(RILA) represents the nation's most successful and innovative retailer
and supplier companies--the leaders of the retail industry. As a
sector, retail is the second largest industry in the U.S., employing 12
percent of the nation's total workforce and conducting $3.8 trillion in
annual sales. RILA's retail and product supplier companies operate
100,000 stores, manufacturing facilities and distribution centers in
every congressional district in every state, as well as
internationally. They pay billions in federal, state and local taxes
and collect and remit billions more in sales taxes. They are also
leading corporate citizens with some of the nation's most far-reaching
community outreach and corporate social responsibility initiatives.
RILA fully believes that passage of this agreement will:
benefit the U.S. economy--producers and consumers alike;
strengthen freedom and security in our Hemisphere;
improve working conditions;
activate critically important textile-apparel-footwear provisions;
and
enhance the legal framework for retail and distribution services.
THE DR-CAFTA WILL BENEFIT THE U.S. ECONOMY--PRODUCERS AND CONSUMERS
ALIKE
Central America and the Dominican Republic make up the second-
largest U.S. export market in Latin America, behind only Mexico. U.S.
sales in the region exceed $15 billion annually--more than is sold to
Russia, India and Indonesia combined--a result achieved in the absence
of reciprocal trade liberalization. Upon full implementation of the
agreement, U.S. goods will be able to enter the participating countries
duty free. In fact, 80% of the commercial goods will become duty free
once the agreement is implemented, with the rest phased out over a ten-
year period. This will help to significantly increase U.S. exports of
farm products, manufactured goods and services to the region. According
to a report by the International Trade Commission on the economic
impact of the agreement, once the agreement is fully implemented,
exports will grow by nearly $2.7 billion.
In addition to increased benefits for U.S. exporters, U.S.
importers and their customers will benefit from implementation of the
DR-CAFTA as well. Most Central American products already enter the
United States duty-free, under preference programs such as the
Caribbean Basin Trade Partnership Act (CBTPA). Enshrining this
treatment in an international agreement with reciprocal obligations
will provide added commercial security as well as a firmer legal basis
under WTO rules. This aspect of the FTA is in effect a tax cut targeted
to those consumers who need it most.
the dr-cafta will strengthen freedom and security in our hemisphere
Within recent memory, conditions in Central America have featured
civil war, chaos, dictators, and Communist insurgencies. Today, the
region is one of fragile democracies that need U.S. support. Elected
leaders are embracing freedom and economic reform, fighting corruption,
and supporting U.S. anti-narcotics and anti-terrorism efforts. But this
positive momentum cannot be taken for granted. Opponents of reform in
the region remain strong.
By implementing the DR-CAFTA, the United States can demonstrate its
support for freedom, democracy, the rule of law, and economic reform in
Central America. Doing so will bolster U.S. security in various ways.
The new economic opportunities will reduce the pressures that help
produce illegal narcotics activity and illegal immigration.
THE DR-CAFTA TAKES THE RIGHT APPROACH ON WORKING CONDITIONS
America's retailers are committed to careful supply chain
management and high ethical standards of corporate conduct in
international sourcing. This applies to products sourced in not just in
Central America, but around the world. Our experience with the DR-CAFTA
countries has shown that they share these values and high standards,
including the field of labor rights. Their constitutions and national
laws generally provide strong labor protections consistent with the
International Labor Organization's four ``core principles.'' Indeed,
labor protections in these countries are largely in line with those in
Morocco and Jordan, whose accession to the status of ``FTA partner''
gained overwhelming Congressional approval in recent years.
The DR-CAFTA will promote economic opportunities and growth that
are likely to become powerful catalysts for improved working conditions
in the region. Through capacity-building and dispute settlement, the
DR-CAFTA will also address those circumstances where better enforcement
of existing labor laws proves necessary.
THE DR-CAFTA'S TEXTILE-APPAREL-FOOTWEAR PROVISIONS WILL BENEFIT
CONSUMERS AND PRODUCERS THROUGHOUT THE VALUE CHAIN
The textile and apparel product category is a hugely important
component of U.S.-Central American trade, and retailers are committed
to finding the best available combination of speed-to-market, product
price, and quality of products for their consumers. U.S. consumers will
benefit from several innovative DR-CAFTA provisions promoted by
retailers to add needed flexibility to the outdated ``yarn forward''
rule of origin. Moreover, qualifying textile and apparel products are
to be afforded immediate U.S. duty free treatment.
Retailers are also quite interested in the health of regional
textile and apparel producers--our valued suppliers. The DR-CAFTA is
strategically designed to improve their competitive situation at a time
when, following the expiration of global textile and apparel quotas,
they face a formidable challenge from outside the hemisphere, most
notably China. The DR-CAFTA will provide regional garment-makers--and
their U.S. suppliers of fabric, yarn and other components--a boost in
competing with Asian producers and will support an estimated 400,000
jobs in the DR-CAFTA countries and 700,000 jobs in the U.S. cotton,
yarn, textile and apparel sectors.
In addition to benefits for textiles and apparel, there are
significant benefits for footwear imports in the DR-CAFTA. A solid
consensus in all segments of footwear manufacturing and retailing
favors immediate duty-free treatment for footwear traded among the DR-
CAFTA countries, excluding a few import-sensitive tariff lines. By
delivering this outcome, the DR-CAFTA lays the groundwork for increased
trade and investment in the footwear sector, supports retailer
strategies designed to maintain geographically diverse sourcing
options, provides substantial benefits to consumers, and poses no risk
to U.S. footwear production.
THE DR-CAFTA ENHANCES THE LEGAL FRAMEWORK FOR RETAIL/DISTRIBUTION
SERVICES
For the first time in a trade agreement, the DR-CAFTA addresses
restrictions on distribution created through restrictive dealer
protection regimes. Such regimes are prevalent in Central America today
and have locked U.S. companies and products into inefficient, exclusive
and effectively permanent relationships with local dealers regardless
of performance. DR-CAFTA rules would require dealer distribution
agreements to permit parties to terminate at the end of the contract or
renewal period without indemnification. These rules will promote more
efficient distribution for U.S. companies and products in the DR-CAFTA
region.
THE DR-CAFTA, ONCE IMPLEMENTED, CAN BE IMPROVED OVER TIME
No FTA is perfect, and as with other FTAs, experience under the DR-
CAFTA may reveal opportunities for useful adjustments in areas like
rules of origin, accelerated tariff phase-out, etc. Some improvements
may require the negotiated approval of all the DR-CAFTA parties; others
may be of the type the United States can make unilaterally. The
implementing legislation should establish a flexible and streamlined
framework for making such adjustments over time, using available tools
such as proclamation authority and consultation/layover.
RILA congratulates the Energy and Commerce Committee for turning
its attention to this important agreement, and stands ready to assist
as the implementation process moves forward. If you have any questions,
please contact Lori Denham, Senior Vice President Policy and Planning,
Paul T. Kelly, Senior Vice President, Federal and State Government
Affairs or Jonathan Gold, Vice President Global Supply Chain Policy.
______
Prepared Statement of Lori Wallach, Director, Public Citizen's Global
Trade Watch
On behalf of Public Citizen's 200,000 members, I thank the
Committee for the opportunity to share my organization's views on the
proposed Central America Free Trade Agreement (CAFTA) NAFTA expansion.
Public Citizen is a nonprofit citizen research, lobbying and litigation
group based in Washington, D.C. with offices Austin, TX and Oakland,
CA. Public Citizen, founded in 1971, accepts no government nor
corporate funds. Global Trade Watch is the division of Public Citizen
founded in 1995 that focuses on government and corporate accountability
in the globalization and trade arena.
CAFTA, signed in May 2004, would expand the economic model
established in the North American Free Trade Agreement (NAFTA) to five
Central American countries and the Dominican Republic. If approved,
CAFTA, like NAFTA, would require its signatory countries to conform
their domestic policies and practices to a broad array of non-trade
dictates, for example regarding the regulation of service sector
companies and foreign investors' operations in other economic sectors
operating within a signatory nation's territory. It would require
signatories to provide certain patent medicine and seed protections
that have been criticized by health and consumer groups worldwide as
undermining consumers' access to these essential ``goods.'' It even
sets constraints on how countries and other political entities may
spend their own tax revenues. In addition, CAFTA contains the same
model of interconnected trade rules and foreign investor protections
that together create incentives that motivate business operations seek
out the most profitable sites and processes for production, even if
these are often contrary to the public interest.
An analysis of CAFTA's provisions reveals that it replicated
NAFTA's provisions to a high degree--often with identical language.
Thus, there is much that we can learn from the 11-year record of NAFTA,
which CAFTA would expand to additional nations.
1. CAFTA NAFTA Expansion is an Outsourcing Agreement: Eleven-Year
Record Demonstrates that the NAFTA Model Lowered Living
Standards on Both Sides of the Border
Since 1994, the United States has lost nearly 1 million jobs on net
due to NAFTA trade,1 with one in six U.S. manufacturing jobs
being eliminated during the NAFTA decade.2 U.S. income and
wage inequality have gone up markedly, with the ratio of both income
and wages of the top five percent of the income and wage distribution
growing nearly 10 percent since NAFTA alone as compared with the bottom
20 percent.3 The U.S. real median wage has scarcely risen
above its 1970 level, resulting in declining or stagnant standards of
living for the nearly 70 percent of the U.S. population that does not
have a college degree.4 During the NAFTA era, the U.S. trade
deficit has risen to historic levels, and approaches six percent of
national income--a figure widely agreed to be unsustainable, putting
the U.S. economy at risk of lowered income growth.5 The U.S.
trade balance with NAFTA countries alone went from a mild surplus with
Mexico and mild deficit with Canada to a ballooning deficit with the
two countries exceeding $110 billion in 2004.6
For our neighbors in Mexico, the economic outcomes of eleven years
of NAFTA are not brighter. Over 1.5 million Mexican campesino farmers
lost their livelihoods to the dumping of commodities such as corn as a
result of NAFTA's agricultural rules,7 while the Mexican
minimum wage has lost 20 percent of its value in real terms, and the
median industrial wage 10 percent of its value 8. The jobs
that were temporarily created in the country's maquiladora sector in
NAFTA's initial years, as plants relocated from the United States, are
increasingly relocating and losing market share to lower wage countries
such as China.9
In both countries, the increased ability of companies to nearly
effortlessly relocate production to lower wage countries--(as NAFTA's
investor protections forbid the policies a country like Mexico might
otherwise use to root foreign direct investment for development)--has
tilted the playing field against the majority of the working population
who are finding it ever more difficult to obtain and maintain quality
employment. Meanwhile, studies commissioned by the U.S. government show
that as many as 62 percent of U.S. union drives face employer threats
to relocate, with over 10 percent of such threats specifically
referring to a relocation to Mexico. The actual factory shut-down rate
following successful union certifications tripled in the years after
NAFTA relative to the years before.10
2. Contradicting Congress' Demand that Trade Pacts Give Foreign
Investors ``No Greater Rights'' within the U.S. than Available
to U.S. Citizens, CAFTA Extends NAFTA's Special Protections for
Foreign Investors that Expose U.S. Taxpayer Funds to Claims in
Closed Trade Tribunals
The changes described above in the NAFTA country labor markets are
supported by the granting in NAFTA and CAFTA of special rights and
privileges to foreign investors from one signatory country operating in
another. In NAFTA, these rights are contained in Chapter 11, which also
provides for foreign investors' private enforcement of these new
privileges through so-called investor-state dispute resolution, a
controversial mechanism also included in CAFTA. The investor-state
system allows corporations to sue governments for cash compensation
before closed trade tribunals for claims based on signatory countries'
policies that may or may not have a demonstrable economic impact on
their expected future earnings. The provisions afford foreign investors
operating in the United States greater rights than those available to
U.S. citizens and businesses under the U.S. Constitution as interpreted
by the U.S. Supreme Court. Thus far, 42 cases have been brought before
the NAFTA investor-state tribunals, 11 have been finalized, and some
$35 million in taxpayer funds have been granted to five corporations
that have succeeded with their claims. An additional $28 billion has
been claimed from investors in all three NAFTA nations in cases
attacking the most basic functions of government. The U.S. government's
legal costs for the defense of just such recent case topped $3 million,
and seven cases against the United States are currently in active
arbitration.
While ostensibly, NAFTA's investor protections were designed to
ensure compensation if property is nationalized by a NAFTA government,
only one of the 42 known NAFTA ``Chapter 11'' cases filed to date
involve expropriation. Instead, investors have challenged domestic
court rulings, water rights, local and state environmental policies,
municipal contracts, tax policy, controlled substances rules, anti-
gambling policies, emergency efforts to halt the spread of mad cow
disease, and even provision of public postal services.
Given that these extraordinary investor rights and their private
enforcement had not been part of any previous U.S. trade agreement, and
that many Members of Congress did not understand these implications at
the time when NAFTA was enacted in 1993, the record of NAFTA's Chapter
11 has generated enormous controversy. Thus in order to obtain a
congressional delegation of Fast Track Trade Authority in 2002, the
administration offered to address Congress' concerns. Fast Track thus
specified that in future U.S. trade agreements, foreign investors
should not have ``greater substantive rights with respect to investment
protections than United States investors in the United States.''
11
Unfortunately, the Executive Branch negotiators failed to meet
Congress' requirements. In CAFTA's Chapter 10 foreign investor
protections and investor-state mechanism actually amplify many of the
problems Congress identified with NAFTA.
CAFTA Would Allow Compensation to Foreign Investors in
``Regulatory Takings'' and ``Minimum Standard of Treatment'' Cases not
Permitted by U.S. Law: CAFTA includes the NAFTA language that requires
foreign investors be compensated for ``indirect expropriation.'' This
provision has been the basis for an array of cases that would not be
permitted under U.S. law, including regulatory takings cases. In one
such case, Metalclad Corporation obtained $16 million from the Mexican
Treasury after being denied a permit to expand a toxic waste facility
until it cleaned up existing contamination.12 Several
additional CAFTA provisions promote regulatory takings cases not
allowed under U.S. law. For instance, the Supreme Court has ruled that
``mere diminution in the value of property, however serious, is
insufficient to demonstrate a taking'' 13 and that the
entire property must be affected permanently. In contrast, NAFTA
Chapter 11 tribunals have found that a government action need only
cause ``significant'' or ``substantial'' impairment of an investment's
value to qualify as a taking.14 For instance, the Metalclad
tribunal held that ``expropriation under NAFTA includes not only open,
deliberate and acknowledged takings of property . . . but also covert
or incidental interference with the use of property which has the
effect of depriving the owners in whole or significant part, of the use
or reasonably-to-be-expected economic benefit of property.''
15 USTR failed to remedy this problem in CAFTA.
To make matters worse, CAFTA allows such claims regarding types of
property not subject to takings action under U.S. law. U.S. law deems
public interest policies governing personal property (property other
than land) to be legitimate exercises of police powers and exempt from
takings claims. In contrast, CAFTA's broad definition of what
categories of property are subject to compensation claims includes an
array of non-real estate property such as assumption of risk and also
bonds, loans, stocks, and intellectual property rights.
In response to criticism that investment rules in CAFTA allow for
broad regulatory takings claims, the USTR will likely point to CAFTA,
Annex 10-C, which reads: ``Except in rare circumstances,
nondiscriminatory regulatory actions by a Party that are designed and
applied to protect legitimate public welfare objectives, such as public
health, safety, and the environment, do not constitute indirect
expropriations.'' 16 Unfortunately, this language has
precisely the opposite effect claimed. This language enshrines the
right of foreign investors to challenge a wide array of public health
and safety regulations not be subject to U.S. taking claims. U.S. law
safeguards all public interest regulations governing personal property,
yet this language reiterates that such policies are subject to CAFTA
challenge. Moreover, the U.S. government would have no capacity to
affect whether such cases are brought only in ``rare'' circumstances.
Foreign investors decide whether to file these cases. (And, the U.S.
legal defense cost for just one such case, Methenex's attack on
California's ban on the gasoline additive MTBE, has already cost $3
million in U.S. taxpayer funds.) Further, the ultimate decision whether
or not to grant compensation in such challenges remains with investor-
state tribunals on a case-by-case basis. Moreover, when deciding such
cases, tribunals will reference other specific provisions of CAFTA that
directly conflicts with the Annex's general language. There have been
numerous NAFTA cases involving toxic substances, including Phillip
Morris' threat against a proposed Canadian tobacco control law, and
Canadian cattlemen's NAFTA challenge of U.S. actions to prevent entry
into the U.S. of mad cow disease. To avoid future such cases and to
bring CAFTA into conformity with U.S. takings law, the scope of
property subject to such claims in CAFTA needed to have been limited to
real estate and the ``indirect expropriation'' language needed to have
been eliminated, or at least defined in the context of U.S. takings
standards that require that virtually all of a property's value must be
taken permanently to obtain compensation.
CAFTA Would Allow Compensation to Foreign Investors in Cases in
which U.S. Law Only Permits Injunctive Relief: Under U.S. law, both
foreign and domestic firms can sue under the Due Process or Equal
Protection Clauses of the Constitution for injunctive relief, but they
are not allowed to sue for monetary relief. Under NAFTA's investment
rules--and under CAFTA were it to be approved--foreign investors are
empowered to sue for monetary relief on similar grounds. CAFTA extends
this NAFTA problem by allowing foreign investors to obtain taxpayer
compensation not only for claims of expropriation, but also based on
national treatment (non-discrimination) and ``fair and equitable
treatment'' claims--which are the trade agreement equivalent to Due
Process or Equal Protection Clauses claims in U.S. law.
CAFTA Would Eviscerate the Long-established Principle that
Governments Can Remedy a ``Nuisance'' without Compensating Polluters:
The expansive definition in CAFTA of what sorts of foreign investments
are subject to compensation covers government actions to prevent a
public nuisance. Given the record of the related NAFTA provisions, this
element of CAFTA is likely to generate further claims by chemical
companies attempting to combat environmental regulation. Under NAFTA,
foreign investors are demanding compensation for California's ban of
the gasoline additive MTBE which has been found to be polluting scarce
water resources in the state and for California's open pit mining
reclamation law. Yet, under the U.S. Supreme Court holding in Lucas v.
South Carolina Coastal Council, pollution that harms public or other
properties is a nuisance that can be regulated by states without
compensation.17 USTR failed to remedy this problem in CAFTA.
CAFTA Would Empower Foreign Investors to Overcome the Long-
established Sovereign Immunity Shield to Pursue U.S. Taxpayer
Compensation In Property Claims from which U.S. Residents and Companies
Are Barred: NAFTA panels have explicitly refused to dismiss investor
challenges when governments have raised sovereign immunity as a defense
in investor-state challenges--apparently allowing firms to sue
governments at any level regarding any issue for any amount of money.
Indeed, in these cases, investor-state tribunals have accepted the
argument raised by some foreign investors that Congress waived federal
sovereign immunity when it passed NAFTA. USTR failed to remedy this
problem in CAFTA with explicit language clarifying that sovereign
immunity was not waived, thus providing an open door for future such
challenges.
3. CAFTA Would Forbid Congressional, States' Anti-Offshoring Policies
that Require Government Contract Work be Done by U.S. Workers;
Forbids Environmental, Other Procurement Rules
CAFTA's rules on government procurement apply to an array of
federal government agencies as well as the states that are listed as
``covered entities'' in Chapter 9, Annex 9.12 (b) (i). In September
2003, the United States Trade Representative sent a letter to all 50
governors, requesting that they commit their states to be bound by the
procurement provisions in all bilateral and regional trade pacts under
negotiation, including CAFTA. The letter touted the potential for U.S.
suppliers to bid on foreign government contracts, but failed to mention
the requirements the procurement chapters CAFTA and other agreements
imposed on states. Initially, twenty eight states were listed as bound
in the CAFTA text. However, since then, state officials have become
much more aware of the implications that binding state procurement
policy to CAFTA's rules would have on their ability to determine what
procurement policies are in the best interests of the state, including
policies that use state purchasing power to further social,
environmental, and economic development goals.
As a result, a majority of U.S. states (30) have rejected CAFTA's
government procurement rules and decided it is not in their best
interest to be bound. In 2004, seven governors (from Iowa, Kansas,
Maine, Minnesota, Missouri, Oregon, and Pennsylvania) rescinded their
previous commitments on behalf of their states to be bound to CAFTA's
procurement rules. Other states (Montana, Nevada, Wisconsin, and
Virginia) declined the USTR's request outright. Governors of states
that remain bound by CAFTA, including Texas and Washington, have
requested that additional reservations be taken. (Only some of those
requests have been incorporated into the CAFTA text. Washington's
request was rejected in an August 13, 2004 letter from Ambassador
Zoellick to Washington Governor Gary Locke.) In early 2005, the
National Conference of State Legislatures wrote to the USTR, requesting
that the USTR respond to the myriad concerns of state legislators. The
Intergovernmental Policy Advisory Committee (IGPAC) issued
recommendations in August 2004 that state legislative leaders be carbon
copied on all requests sent to governors, as state legislators to date
have been cut out of the consultation process, despite the fact that in
most states, the Legislative Branch has the authority to set state
procurement policy. The USTR explicitly denied that request, and sent
another letter to governors requesting that they sign on to the
procurement provisions of free trade agreements with Panama and Andean
countries. Most recently, in April 2005, the Maryland General Assembly
passed legislation over Governor Ehrlich's veto which stipulated that
it was the authority of the legislature, not the Governor, to sign on
to the government procurement rules in trade pacts. The bill also
declared invalid previous expressions of consent made by governors,
including Governor Ehrlich's letter offering to bind Maryland to
CAFTA's procurement provisions.
State officials' concerns stem from the restrictions that CAFTA's
rules impose on their ability to maintain existing and adopt new
procurement policies in the public interest. CAFTA's procurement
chapter prohibits many common purchasing policies, seriously weakening
governments' flexibility to use procurement as policy tool to promote
economic development, environmental sustainability, and human rights.
These rules also apply to federal government procurement policies:
Requirements that Government Work Be Performed in the United
States by U.S. Workers Are Prohibited: If CAFTA were approved, federal
and state governments would be required to treat companies located in
the six CAFTA countries identically to U.S. domestic companies when
governments seek to procure goods and services. This means neither
Congress nor state governments could give preference to domestic or
local firms or require that to obtain government contracts, firms must
employ U.S. workers (CAFTA Article 9.2).
Sweat-Free, Recycled Content, Renewable Source and Other Labor
and Environmental Criteria Banned: CAFTA requires that ``a procuring
entity shall not prepare, adopt or apply any technical specification
describing a good or service with the purpose or the effect of creating
unnecessary obstacles to trade'' and that technical specifications are
limited to ``performance requirements rather than design or descriptive
characteristics.'' These constraints mean that procurement policies
that set criteria for how a good is made or how a service is provided
are prohibited--putting preferences for recycled content or renewable
energy, ``green'' building requirements, and bans on goods made with
the worst forms of child or slave labor at risk as ``barriers to
trade'' (CAFTA Article 9.7).
Consideration of Bidding Firms' Labor, Tax, Environmental, Human
Rights Records Forbidden: CAFTA limits what sorts of qualifications may
be required of companies seeking to supply a good or service to a
government. Conditions for participation in bidding are limited to
``those that are essential to ensure that the supplier has the legal,
technical and financial abilities to fulfill the requirements and
technical specifications of the procurement.'' CAFTA's limits on the
requirements that can be imposed on contractors prohibit conditions
such as prevailing wage and living wage requirements, as well as
consideration of suppliers' environmental or labor track records (CAFTA
Article 9.8).
4. Opposition to CAFTA NAFTA Expansion Wide and Varied, Having Grown
Since NAFTA
As successive administrations have failed to reverse the damage and
demonstrated, significant problems of NAFTA's foreign investor
protection model, opposition has grown in all quarters. The Association
of State Supreme Court Justices, U.S. League of Cities, National
Conference of State Legislatures, National Association of Counties, and
National Association of Towns and Townships all have expressed concerns
about the investment provisions of CAFTA.
Concerns about CAFTA's foreign investor protection by these
typically pro ``free trade'' associations of state and local officials,
groups that are concerned about our nation's system of federalism and
the integrity of our domestic courts, has been joined by outright
opposition to CAFTA from other unexpected quarters, suggesting the
degree to which this agreement signed a year ago is seen not to serve
the U.S. national interest. The National Association of State
Departments of Agriculture, for one, concerned about CAFTA's
agricultural provisions called on Congress to oppose
CAFTA.18 These and other agricultural groups are concerned
about declining farm revenue even as volumes of food trade increased
under NAFTA, and that the United States is about to become a net food
importer. Furthermore, these groups take to heart the claims of pro-
CAFTA forces, who continually repeat that CAFTA is a stepping stone to
a proposed broader Free Trade Area of the Americas (FTAA).19
Many U.S. economic sectors views of CAFTA are tied to their analysis of
how competition with Brazil in a NAFTA expansion from Alaska to Tierra
del Fuego would affect their export capacity in beef, soy, citrus,
sugar and ethanol.
Many other groups have also expressed opposition to CAFTA NAFTA
expansion. Human Rights Watch has produced analyses of the failure of
Central American labor law and enforcement practices to meet the
minimal International Labor Organization core labor
standards,20 an analysis that has been confirmed by the U.S.
Department of State's annual human rights reports.21
And U.S. Latino organizations who supported NAFTA, from the
nation's largest and oldest Hispanic civil rights organization the
League of United Latin American Citizens to an array of immigrant
rights groups representing Central Americans in the United States, have
also indicated their opposition the current terms of the agreement,
concerned that trade-related job loss disproportionately affects U.S.
Latinos and that CAFTA's negative repercussions for Central America are
foretold by NAFTA's negative results in Mexico.22
5. Central American Public Opposition to CAFTA NAFTA Expansion Is Based
on NAFTA's Record of Destroying the livelihoods of 1.5 Million
Mexican Small Farmers and U.S. Heavy-Handed Tactics Forcing
Price-Raising Medicine Policies, Essential Service
Privatizations
Lawmakers concerned about the implications of the so-called ``Arab
Street'' in the Middle East should also pay attention to the passionate
CAFTA opposition on the ``Latin Street'' of Central America. Nearly one
out of every 25 El Salvadorans have publicly rallied against CAFTA in
the past several years, and polls indicate that a majority of citizens
in Guatemala and elsewhere oppose the terms of CAFTA.23 In
Honduras, Guatemala and Nicaragua, massive protests have also occurred
against CAFTA, while it is unclear if Costa Rica's congress will
approve the deal.24
Officials from the U.S. Trade Representative's office have taken to
threatening Costa Rica that if the democratically-elected Congress
there determines the pact is not in their nation's interest and rejects
it, the United States will remove that nation's existing terms of
access to the U.S. market provided under the Caribbean Basin Initiative
(CBI). These threats continue today despite the March 2005 letter by
Ways and Means Committee Ranking Member Charles Rangel (D-NY) calling
upon the administration to desist these misleading pronouncements. As
Rep. Rangel's letter pointed out, CBI is a ``congressionally mandated
program [whose] benefits are guaranteed on a permanent basis, unless
the Congress amends current U.S. law.'' The representative said he
would oppose such an amendement of U.S. law, characterizing the
administration's remarks as ``thinly veiled blackmail.'' 25
Regardless of the Administration's bullying and disrespectful
treatment of some CAFTA countries, certainly Congress would be
concerned with the underlying cause of such passionate opposition to
CAFTA in Central America--opposition whose protests have been met with
increasing violence by governments. This includes the murder by
military troops in Guatemala of two Mayan protestors--an act of
military violence by the army explicitly forbidden in the 1996 peace
accords.26
The causes of opposition include CAFTA's service sector rules,
which would require these nations to privatize and deregulate numerous
essential services such as energy and other utilities, health care and
more, as well as foreign investor protections, which would create a new
set of rights for foreign investors to acquire ownership over natural
resources and land and pharmaceutical patent requirements, including
extended data exclusion terms, which would hurt poor people's access to
medicines and take Central American governments' abilities to respond
to public health crises such as HIV-AIDS. Fury about these severe
threats has been exacerbated by the administration's heavy handed
tactics, for instance in pressuring Guatemala to rescind a law that
would have improved access to generic, life-saving medicines or in
threatening Costa Rica with removal of CBI benefits.27
Now major Central American political parties, Catholic bishops, the
Central American Council of Churches and other mainstream, important
Central American interests have come out against CAFTA as a threat to
the region. In addition, eighteen of the most democratic, independent
and representative union federations throughout Central America
representing workers in the private and public sector, including in
export-oriented manufacturing and agriculture, have demanded stronger
workers rights than those provided under CAFTA.28 They have
noted that the existing CBI arrangement affords concerned citizens with
the International Labor Organization core rights and with the greater
ability to improve Central American labor law than the proposed CAFTA's
roll-back CBI labor provisions.
6. Given the NAFTA Record and Growing Central American Public
Opposition, CAFTA Supporters Resort to Increasingly Dubious
Arguments'
Given this broadscale U.S. and Central American opposition to a
NAFTA expansion, pro-CAFTA forces have increasingly resorted to
disconnected arguments and exaggerated and misrepresentative claims
about the agreement. For instance, the U.S. Chamber of Commerce has
produced a flawed study projecting U.S. economic gains from a Central
America agreement. But to obtain that conclusion, the Chamber had to
assume that--contrary to the history of every trade agreement the
United States has signed--the United States would receive no new
imports from the CAFTA countries if the pact went into
effect.29 The study's methodology additionally implies that
over 80 percent of the Honduran economy would have to absorbed by U.S.
exports by 2013, a potentially socially and economically destabilizing
outcome if true.30
Despite this projection that Central American countries would not
gain from a CAFTA, pro-CAFTA forces have simultaneously asserted that
CAFTA would save the U.S. and Central American textile industries from
the end of the global textile and apparel quota system.31
Here too, their claims are wildly misleading, since experts from the
U.S. International Trade Commission to the Organization for Economic
Cooperation and Development (OECD) have demonstrated that China enjoys
a significant technological, wage and input cost advantage over the
Central American countries. This means that, with or without a CAFTA,
the expiration of the Multi Fiber Arrangement quota system will result
in Central America losing a great deal of its current production and
employment in the textile and apparel industry.
The notion that CAFTA would affect this situation is beyond
bizarre. Already under CBI, CAFTA countries' textile and apparel
exports enter the United States duty free. CAFTA provides no additional
benefit for entry. Indeed, CAFTA loosens the CBI rules of origin,
meaning more Chinese goods could enter through CAFTA countries if CAFTA
were implemented than are now permitted.
Already, apparel imports from China jumped amount in the first
quarter, and by as much as 1,521 percent in some customs
categories.32 While Congress may seek to address this flood
of cheap Chinese imports, this is a separate problem than CAFTA and
would require a separate solution. The debate around CAFTA is not a
question of ``whether U.S. workers would rather lose their jobs to
China or to Central America,'' as Carlos Sequeira, Nicaragua's chief
CAFTA negotiator put it.33 Congress should instead focus on
the flaws of CAFTA, which would loosen CBI's requirement that U.S.
inputs be used to enjoy duty-free access to the U.S. market and
undermine CBI's labor rights protections, while still not proffering to
the dying Central American industry any access benefits that they do
not already enjoy through CBI.
CONCLUSION
The bottomline in Congress' consideration of CAFTA should be
whether extending the NAFTA model will help us create a brighter future
for our children and grandchildren. Even considering only the well-
documented NAFTA record of undermining the livelihoods of 1.5 million
Mexican farmers, suppressing real median wages in the United States and
Mexico, gutting the U.S. manufacturing base, coinciding with record-low
prices paid farmers for the food they produce in all three countries
even while consumer prices increased, and exposing some 42 domestic
environmental, health, zoning and laws and regulations to attack in
closed investor-state tribunals and the payment of some $35 million in
taxpayer funds to foreign investors for the lost NAFTA-guaranteed
profits they lost, it seems quite clear the answer is no. If one adds
to the NAFTA evidence the problems caused by the CAFTA provisions that
go beyond even what NAFTA requires--for instance in the foreign
investor protections chapter or regarding drug patents--the answer
becomes only clearer.
As a group that works with consumer organizations around the world,
we would urge Congress to oppose this agreement simply on the basis of
its intellectual property rules which are certain to undermine
affordable access to essential medicines for poor consumers in the
Central America. Many other organizations are submitted testimony about
these scandalous provisions of CAFTA NAFTA expansion. At issue are life
or death matters: generic versions of the cocktail of anti-retroviral
drugs essential to extending the lives of those infected with HIV cost
several hundred dollars for a yearlong course while the brand name
patented version of the same drugs cost $5,000 per year. If the CAFTA
drug patent rules would go into effect in the Central American
countries and the Dominican Republic, many people now able to have
access to these life saving HIV-AIDS medicines and also drugs vital to
fighting tuberculosis and other deseases will not have access to these
medicines--either because they cannot afford to purchase them or
because their government health agencies cannot afford them to provide
to their public.
Thus given CAFTA NAFTA expansion's potential extension of the
failures of NAFTA to people in six additional nations and the damage to
U.S. residents that further extension of this model would pose, we urge
Congress to oppose NAFTA's expansion to Central America and beyond.
Endnotes
1 Robert E. Scott, ``The High Price of `Free' Trade:
NAFTA's Failure has cost the United States jobs across the nation,''
Economic Policy Institute Briefing Paper, Nov. 2003.
2 This number refers to manufacturing job loss since the
most recent manufacturing employment peak in 1998 of 17.6 million,
relative to the 2003 number of 14.6 million. See Josh Bivens, Robert
Scott, and Christian Weller, ``Mending manufacturing: Reversing poor
policy decisions is the only way to end current crisis,'' Economic
Policy Institute Briefing Paper #144, Sept. 2003.
3 Lawrence Mishel, Jared Bernstein, and Sylvia
Allegretto, The State of Working America 2004/05, (Washington, DC:
Cornell University Press, 2004), at 69 and 145.
4 Lawrence Mishel, Jared Bernstein, and Sylvia
Allegretto, The State of Working America 2004/05, (Washington, DC:
Cornell University Press, 2004), at 154.
5 Nouriel Roubini and Brad Setser, ``The US as a Net
Debtor: The Sustainability of US External Imbalances,'' New York
University Briefing Paper, Nov. 2004.
6 U.S. Census Numbers.
7 John Audley, Sandra Polaski, Demetrios G.
Papademetriou, and Scott Vaughan, ``NAFTA's Promise and Reality:
Lessons from Mexico for the Hemisphere,'' Carnegie Endowment for
International Peace Report, Nov. 19, 2003.
8 Carlos Salas, ``Highlights of Current Labor Market
Conditions in Mexico,'' Global Policy Network Country Brief, April
2003.
9 Sanjaya Lall, Manuel Albaladejo, Mauricio Mesquita
Moreira, ``Latin American Industrial Competetitveness and the Challenge
of Globalization,'' Inter-American Development Bank OCassional Paper
SITI 05, June 2004.
10 Kate Bronfenbrenner, ``The Effects of Plant Closing
or Threat of Plant Closing on the Right of Workers to Organize,'' North
American Commission for Labor Cooperation Report, 1997.
11 19 U.S.C. 3802(3), Chapter 24, ``Bipartisan Trade
Promotion Authority: Trade Negotiating Objectives.''
12 Award, Before the Arbitral Tribunal constituted Under
Chapter 11 of the North American Free Trade Agreement, Metalclad
Corporation v. the United Mexican States, International Centre for
Settlement of Investment Disputes (Additional Facility), Aug. 25, 2000.
13 Concrete Pipe and Products v. Construction Laborers
Pension Trust, 508 U.S. 602, Jun. 14, 1993, at 615.
14 Interim Award by Arbitral Tribunal, In the Matter of
an Arbitration Under Chapter 11 of the North American Free Trade
Agreement between Pope & Talbot Inc. and the Government of Canada,
United Nations Commission on International Trade Law, Jun. 26, 2000, at
37; Award, Before the Arbitral Tribunal constituted Under Chapter 11 of
the North American Free Trade Agreement, Metalclad Corporation v. the
United Mexican States, International Centre for Settlement of
Investment Disputes (Additional Facility), Aug. 25, 2000, at 28. The
Metalclad panel stated that expropriation under NAFTA ``includes not
only open, deliberate and acknowledged takings of property such as
outright seizure or formal or obligatory transfer of title in favor of
the host state, but also covert or incidental interference with the use
of property which has the effect of depriving the owner in whole or in
significant part of the reasonably-to-be-expected economic benefit of
the property.''
15 Award, Before the Arbitral Tribunal constituted Under
Chapter 11 of the North American Free Trade Agreement, Metalclad
Corporation v. the United Mexican States, International Centre for
Settlement of Investment Disputes (Additional Facility), Aug. 25, 2000,
at 33.
16 Central America Free Trade Agreement, Final Version,
Aug. 5, 2004, Annex 10-C, at 4(b).
17 Lucas v. South Carolina Coastal Council, 505 U.S.
1003, at 1015-19 (1992).
18 Alan Guebert, ``State Ag Directors Whack CAFTA, White
House,'' Aberdeen News, March 11, 2005.
19 Jorge Arrizurieta, ``A needed precursor to FTAA,''
Florida Sun Sentinel, March 11, 2005
20 Michael Bochenek, ``Turning A Blind Eye: Hazardous
Child Labor in El Salvador's Sugarcane Cultivation,'' Human Rights
Watch Report, June 2004; ``Pregnancy-Based Sex Discrimination in the
Dominican Republic's Free Trade Zones: Implications for the U.S.-
Central America Free Trade Agreement (CAFTA),'' Human Rights Watch
Briefing Paper, April 2004; Carol Pier, ``Deliberate Indifference: El
Salvador's Failure to Protect Workers' Rights--implications for
CAFTA,'' Human Rights Watch Report, Dec. 2003; Judith Sunderland,
``From The Household To The Factory: Sex Discrimination in the
Guatemalan Labor Force,'' Human Rights Watch Report, Jan. 2002.
21 U.S. Department of State, ``Report on El Salvador,''
2001 Country Reports on Human Rights Practices.
22 ``Another America is Possible: The Impact of NAFTA on
the U.S. Latino Community and Lessons for Future Trade Agreements,''
LCLAA and Public Citizen, Aug. 2004
23 Angus Reid Global Scan, ``Guatemalans Decry CAFTA
Deal With U.S.,'' April 2005
24 Karen Hansen-Kuhn, ``Central Americans Speak Out
Against DR-CAFTA: Major Issues and Mobilizations,'' Alliance for
Responsible Trade, Mar. 2005, at 10.
25 Rep. Charles B. Rangel, ``Rep. Rangel Reacts to
Reported `Threat' from Administration Official to CAFTA Countries,''
Press Statement, March 22, 2005.
26 Sergio de Leon, ``Police, protestors clash ahead of
Guatemala-U.S. free trade vote,'' Associated Press, Mar. 9, 2005.
27 Catherine Elton, ``Activists Fear Free Trade Act Will
Restrict Access to AIDS Drugs in Central America,'' Voice of America,
April 2005.
28 ``The Real Record on Workers' Rights in Central
America,'' AFL-CIO, Apr. 2005.
29 U.S. Chamber of Commerce, ``Chamber Hails Economic,
Job Benefits of DR-CAFTA,'' Issue Briefing, Feb. 2005.
30 Todd Tucker, ``Fool Me Twice? Chamber of Commerce
Distorts NAFTA Record, Hides CAFTA Costs,'' Public Citizen, Mar. 2005.
31 Rossella Brevetti, ``Ambassadors from Central
America, Dominican Republic Urge Action on FTA,'' BNA No. 27, Feb. 10,
2004. See also, Martin Vaughan, ``Pro-CAFTA Business Alliance Lobbying
House Members,'' Congress Daily PM, Jan. 25, 2005.
32 Kristi Ellis, ``China's First Qtr Surge,'' Women's
Wear Daily, April 4, 2005.
33 Paul Magnusson, ``This Trade Pact Won't Sail
Through,'' Business Week, March 28, 2005.