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S. HRG. 110–1053

OVERSIGHT OF U.S. TRADE

PREFERENCE PROGRAMS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 12, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

WITNESSES

Yager, Dr. Loren, Director, International Affairs and Trade, Government

Accountability Office, Washington, DC .............................................................. 4

Aldonas, Grant, principal managing director, Split Rock International, Arlington, VA .................................................................................................................. 6

Gresser, Edward, director, Project on Trade and Global Markets, Progressive

Policy Institute, Washington, DC ....................................................................... 8

Small, Fr. Andrew, foreign policy advisor, United States Conference of Catholic Bishops, Washington, DC ............................................................................... 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Aldonas, Grant:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 29

Responses to questions from committee members ......................................... 40

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 48

Cantwell, Hon. Maria:

Prepared statement .......................................................................................... 49

Letter to Senator Baucus from Secretary of State Condoleezza Rice, undated .............................................................................................................. 51

Letter to Senator Grassley from Secretary of State Condoleezza Rice,

undated .......................................................................................................... 53

Letter to Senator Baucus from Afghan Commerce Minister Dr. Mir Mohammad Amin Farhang, dated June 12, 2008 ........................................... 55

Letter to Senator Grassley from Afghan Commerce Minister Dr. Mir

Mohammad Amin Farhang, dated June 8, 2008 ........................................ 56

Letter to Senators Baucus and Lugar from Pakistan Commerce Minister

Ahmed Mukhtar, dated June 12, 2008 ....................................................... 57

Letter to Senator Baucus from Pakistan Ambassador Husain Haqqani,

dated June 10, 2008 ...................................................................................... 58

Letter to Senator Grassley from Pakistan Ambassador Husain Haqqani,

dated June 10, 2008 ...................................................................................... 60

Letter to Senators Baucus, Grassley, Biden, and Lugar from Richard

Holbrooke, dated June 11, 2008 .................................................................. 62

Letter to Senators Baucus and Grassley from Lee H. Hamilton, dated

June 11, 2008 ................................................................................................ 64

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Gresser, Edward:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 66

Responses to questions from committee members ......................................... 80

Page

IV

Small, Fr. Andrew:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 85

Responses to questions from committee members ......................................... 95

Yager, Dr. Loren:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 98

Responses to questions from committee members ......................................... 110

COMMUNICATIONS

Albaugh, Inc., et al. ................................................................................................. 113

Coalition for GSP ..................................................................................................... 116

Mauritius-U.S. Business Association, Inc. ............................................................. 124

McDermott, Hon. Jim .............................................................................................. 127

National Retail Federation ..................................................................................... 130

Oxfam America ........................................................................................................ 134

Repsol YPF ............................................................................................................... 139

Republic of Mauritius .............................................................................................. 163

U.S. Chamber of Commerce .................................................................................... 165

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OVERSIGHT OF U.S. TRADE

PREFERENCE PROGRAMS

THURSDAY, JUNE 12, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Bingaman, Lincoln, Cantwell, Grassley, Smith,

and Bunning.

Also present: Democratic staff: Bill Dauster, Deputy Staff Director and General Counsel; Demetrios Marantis, Chief International

Trade Counsel; Chelsea Thomas, International Trade Analyst; and

Claudia Martinez Garcia, Fellow. Republican staff: Claudia Poteet,

International Trade Policy Advisor; David Johanson, International

Trade Counsel; and Stephen Schaefer, Chief International Trade

Counsel.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

On the plains of Moab, Moses told the Israelites, ‘‘If you see your

fellow’s ox fallen on the road, do not ignore it. Help him to get it

to its feet.’’ In Montana’s Gallatin Valley, farmers apply the same

good neighbor policy. Once Montana families have harvested their

crops, they help their neighbors to finish their work. They help because it is the right thing to do; it is just who we are as Montanans.

In the global economy, just as in the plains of Moab and the valleys of Montana, good neighbors do what they can. They do what

they can to help those in need. That is why America has trade preference programs, and that is why we have the Generalized System

of Preferences and the Andean Trade Preference Act.

Today we will review this important piece of our trade agenda,

our trade preference programs. Many Senators on this committee

care deeply about these programs: Senator Bingaman has advocated enhanced trade preferences for Haiti, the poorest country in

the Americas; Senators Cantwell and Hatch have worked hard to

bring economic opportunity to war-torn Afghanistan and Pakistan;

and Senator Smith has advocated providing preferences for the

world’s least-developed countries.

Preference programs are the tools that we have, but as we continue to use them to help our neighbors we need to ask, are these

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the tools that our neighbors need? Are our preference programs the

best way to help our neighbors?

With two preference programs expiring this year and the rest in

coming years, we need to ask these questions of ourselves and of

those whom we wish to help. For us and for our neighbors, we cannot let these programs expire. But for us and our neighbors, we

must make our preference programs the best that they can be.

First, we must look at how we are helping. Can beneficiary countries utilize our programs, or are they too complicated to be useful?

Do staggered and short-term extensions create too much uncertainty? Would longer-term programs be more effective, or would

longer-term programs reduce the incentive for countries to be better trade partners?

Second, we must look at which countries we are helping. Are we

helping those in greatest need? Do countries like Bangladesh and

Cambodia suffer because America does not give them preferences

as favorable as those that we provide to our African partners?

Should we continue to provide preferential market access to more

economically advanced countries like Brazil and Russia? Are we

helping countries that could be doing more to help themselves,

frankly?

Finally, we must look at why we are helping. Let us ask how

these programs help our economy. Do these programs work for U.S.

businesses? Do they create jobs here at home? Are American investments and beneficiary countries secure? We do not want to

help countries that refuse to help themselves, and we do not want

to undermine America’s goals in multilateral trade negotiations.

We help because it is the right thing to do. We do it because our

programs help others to help themselves. We do it to help build

sustainable economies in a developing world. We help because

these programs often work: Singapore, Chile, and Korea are moving from beneficiary countries to dynamic global economies.

Farmers in the Gallatin Valley of Montana have a few months

until harvest. We here have a few months until two of these programs expire. Montana’s farmers will use that time well, and we

must do the same. Let us extend these programs the right way. Let

us help to get our neighbor’s oxen back on their feet. Let us help

our neighbors to reap a plentiful harvest that we all can enjoy.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Mr. Chairman, 30 seconds for a point of personal privilege. Because we are dealing with things like how the

United States can help the rest of the world, I would like to point

out that I would be remiss if I did not say a few words about my

home State of Iowa, and there are a lot of other States in the Midwest affected, being very hard hit either by tornadoes, which was

the case of my home town of New Hartford or neighboring Parkersburg. Now much of the eastern part of Iowa and parts of central

Iowa are under rains and floods that are as bad as they were in

1993.

Just last night, four boys were killed at a Boy Scout camp in

western Iowa when a tornado went through. So I would like to

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make sure that the people back home, and here, know that we are

concerned about what happens back home as well as around the

world.

The CHAIRMAN. I might say, Senator Grassley, I am just so impressed how people are pitching in, throwing sandbags, and helping as good neighbors in Iowa, helping everybody out in this tragedy.

Senator GRASSLEY. Yes. Very characteristic of our kind of people.

This is a very important hearing, Mr. Chairman, so thank you

very much. It is something you and I have had a great deal of discussion on, and we always get together on these issues. We may

be coming from a little different point of view, but we believe that

these programs do serve a very valuable purpose.

Our trade preferences merit fundamental reconsideration on

three levels: first, what is their purpose; second, how effective are

they in achieving it or can their operation be improved; and third,

do U.S. trade preferences undermine our broader trade policy objectives to any extent? If so, how can they be reconciled? This reconsideration of our preference programs is needed because the answers to at least some of these questions may have changed since

these programs were started decades ago.

Those changes may have consequences for how we utilize our

trade agenda to advance our national economic and foreign policy

interests. If we accept that our preference programs are primarily

intended to help facilitate economic development in beneficiary

countries, it is natural then to ask how well they are achieving that

objective.

According to GAO, the distribution of benefits appears limited.

Our broadest preference program, GSP, has been in place since

1975. Of the 131 beneficiary countries, the top 10 account for over

three-quarters of our imports under GSP. Similarly, if you consider

all preference programs together, the top 4 beneficiary countries account for over half of our imports under those programs, while the

top 25 account for over 95 percent of such imports. A threshold concern then is how to spread those benefits more broadly.

The composition of imports raises another concern. Fuel accounts

for about 60 percent of our imports under preference programs.

How can we utilize our preferences to better facilitate vertically integrated business development in beneficiary countries outside the

energy sector? That is an issue that we have been grappling with

under the African Growth and Opportunity Act (AGOA).

On the other hand, we also need to consider the point at which

it becomes appropriate to limit or withdraw benefits under preference programs. The GSP does contain limitations on the amount

of preferential treatment to beneficiary countries, but those limitations can be waived.

Congress took a first step in reforming the waiver framework in

2006 by providing for the review and revocation of such waivers if

they have been in place for 5 consecutive years and the volume of

imports reflects that such imports have become super-competitive.

We need to further review the conditionality that attaches to our

various preference programs and assess whether the operation and

administration of those conditionalities can be improved.

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We must also guard against complacency. Trade preferences

should not be taken for granted. That goes for U.S. importers as

well as foreign governments. I am concerned that we are seeing

evidence of complacency from some of the advanced developing

countries in ongoing WTO Doha Round negotiations. If trade preferences become an obstacle to achieving broad multilateral market

liberalization, then we need to rethink the construct of our preference programs.

And, finally, we need to consider, what are the limitations of

these programs, and other factors such as civil strife, conflict, inadequate infrastructure, and an inefficient transportation network.

Poorly developed capital markets, and even political corruption

may play a large role in impeding sustainable economic development.

So I put it to our witnesses: how should we utilize our preference

programs to better facilitate this sort of sustained economic development? As developing countries prosper, how do we transition

them to more mature reciprocal trading relationships?

Thank you.

The CHAIRMAN. Thank you very much, Senator.

I would like, now, to introduce our witnesses. Today’s panel begins with Loren Yager, Director of International Affairs and Trade,

U.S. Government Accountability Office. Following Dr. Yager is Mr.

Grant Aldonas, principal managing director for Split Rock International. Grant, welcome back to the committee.

Mr. ALDONAS. Thank you.

The CHAIRMAN. Our third witness is Ed Gresser, director of the

Project on Trade and Global Markets at the Progressive Policy Institute, and the author of ‘‘Freedom From Want.’’ Ed, it is very

good to see you back again.

And finally, we welcome Father Andrew Small, Foreign Policy

Advisor for the United States Conference of Catholic Bishops.

Thank you, Father, for attending.

As is our usual practice, I would ask each of you to give about

5-minute statements, and your prepared statements will automatically be included in the record.

Dr. Yager?

STATEMENT OF DR. LOREN YAGER, DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Dr. YAGER. Thank you. Thank you, Mr. Chairman. I am pleased

to be here today to report on our work on U.S. trade preference

programs. Since the committee’s hearing last year on this subject,

GAO has completed two in-depth studies of U.S. preference programs for the Finance Committee and the Committee on Ways and

Means.

This hearing is particularly timely, as it provides an opportunity

for the Congress to review the progress and performance of these

programs as a group and begin to address some of the difficult

questions that you posed in your last hearing and that you both

posed in your opening statements.

In order to contribute to that discussion, I will address two topics

today. First, I will outline key policy trade-offs involving various

5

domestic and foreign interests that are inevitable in the design of

preference programs. Second, I will summarize our recent recommendations regarding the importance of considering the preference programs as a group.

Let me first talk about the policy trade-offs. I know that the committee discussed some of these trade-offs at the last hearing. I

know two of my fellow panelists are also very familiar with the difficult policy trade-offs from their time working for the Finance

Committee and in the administration on these very issues.

First, the programs are designed to offer duty-free access to the

U.S. market, but only to the extent that they do not harm U.S. industries. Because of this, they exclude certain products from dutyfree status, including some that the developing countries are capable of producing and exporting. As a result, there are notable gaps

in product coverage, particularly in agricultural and apparel markets.

The second trade-off involves deciding which developing countries

can enjoy preferential benefits. Two least-developed countries, Bangladesh and Cambodia, have become exporters of apparel to the

United States but do not have duty-free access for their goods because they do not qualify for a regional program. On the other

hand, African private sector spokesmen have raised concerns that

giving preferential access to Bangladesh and Cambodia might endanger the African apparel export industry that has grown up

under AGOA.

This same trade-off involved decisions regarding the graduation

of countries or products from the programs. In terms of products,

over one-third of the trade from GSP beneficiaries, $13 billion in

2006, is no longer eligible for preferences because countries have

exceeded the Competitive Need Limitations for those products. Although the intent of country and product graduation is to provide

greater benefits for poor countries, we repeatedly heard concerns

that China would be most likely to gain U.S. imports as a result

of a beneficiary’s loss of preferences.

Policymakers face a third trade-off in setting the duration of

preferential benefits. Preference beneficiaries and U.S. businesses

that import from them agree that longer and more predictable renewal periods are desirable. Members of Congress have recognized

this argument with respect to Africa and renewed AGOA’s general

provisions until 2015.

However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in

accordance with U.S. interests, such as global and bilateral trade

liberalization.

Let me now turn to the second issue, that the preference programs have proliferated over time. In response to differing statutory requirements, agencies pursue different approaches to monitoring the various criteria set for programs. The result is a lack of

systematic review and little to no reporting on impact.

Let me list just a few examples. One, many countries participate

in more than one of these programs. Of the 137 countries eligible

for preference programs, more than half were eligible for two or

more programs. And while there is overlap in various aspects of

trade preference programs, each program is currently considered

6

separately by Congress based on its distinct time table and expiration date.

Only one preference program directly links to capacity building,

even though many nations lack the capacity to effectively participate in international trade. Finally, separate reporting for the various preference programs makes it difficult to measure progress towards achieving the fundamental and shared goal of promoting

economic development.

To address the concerns I have summarized today, GAO recommended that USTR more consistently review beneficiary countries and hold more joint evaluations and discussions. USTR just

wrote a letter to the Congress detailing their plans to address the

GAO recommendations.

We also suggested that Congress should consider whether trade

preference programs’ review and reporting requirements could be

better integrated. We believe that the hearings held by the committee last year, and again today, are consistent with the need to

consider these programs in an integrated fashion.

Mr. Chairman, this concludes my prepared statement, and I

would be happy to answer any questions that you or other members have.

The CHAIRMAN. Thank you, Dr. Yager.

[The prepared statement of Dr. Yager appears in the appendix.]

The CHAIRMAN. Mr. Aldonas?

STATEMENT OF GRANT ALDONAS, PRINCIPAL MANAGING

DIRECTOR, SPLIT ROCK INTERNATIONAL, ARLINGTON, VA

Mr. ALDONAS. Thank you, Mr. Chairman.

Mr. Chairman, Senator Grassley, members of the committee, I

want to thank you for the opportunity to come back to the Finance

Committee. Before I start, I would just like to add, Mr. Chairman

and Senator Grassley, thanks for the hard work that you have

done, and the committee has done, on Trade Adjustment Assistance

over a sustained period. I have to say that personally I think the

reform and expansion of those programs is absolutely critical to

help American workers meet the challenges of competing in a global economy. So, thank you very much.

The CHAIRMAN. Could you say that one more time, please?

[Laughter.] Thank you.

Mr. ALDONAS. With respect to today’s topic, I want to thank you

as well. I know that it is a busy time for the committee and a busy

time for the Senate, so taking the time to do the oversight necessary on our preference programs is important. As reflected in my

written statement, our preference programs can play a critical role

in our trade and development policies, but in my view, as currently

structured, they work at cross purposes with our goals in both

those areas.

I would summarize my critique of our preference programs like

this: economic development is a microeconomic rather than a macroeconomic phenomenon and involves the process of economic

change. That requires changes in economic incentive structures

that shape individual behavior.

In a global economy, economic development depends heavily on

connecting people to world markets, both as producers and signifiVerDate 11-MAY-2000 14:04 Aug 06, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 57557.000 TIMD PsN: TIMD
7

cantly as consumers. To be effective in that context, our preference

programs, along with the other elements of our development policy,

should focus on eliminating the disincentives that prevent the poor,

both as consumers and producers, from realizing the benefits of

markets. Our goal, as a consequence, should be to offer the broadest possible opportunity for the poor to engage in trade. In return,

we should ask that the beneficiary countries create the conditions

necessary for local markets to flourish.

The question the committee should ask, therefore, as a part of

its oversight, is whether our preference programs meet that challenge. Do they maximize the incentives facing market participants

in beneficiary countries in ways that ensure broad economic opportunity, both locally and globally for the poor? In my view they do

not, for the reasons I stated in my written statement.

Within that framework, I do want to highlight one problem in

particular, and that is the inconsistency between our preference

programs and the other aspects of our trade policy that, from my

perspective, are just as important to economic development. And

here I may differ slightly with some of my colleagues, including my

good friend, Fr. Andrew.

Trade agreements are preferable to preferences for a pretty simple reason: the benefits of trade flow from both exports and imports. The real gains from trade come from efficiencies generated

by specialization, in other words, shifting your economy toward

what it does best.

Focusing solely on exports eliminates the benefits you gain from

imports and the freedom they give you to specialize, which is why

we should encourage developing countries, particularly the more

advanced developing countries, to engage fully in trade liberalization so that they gain from both ends of the trade equation.

As currently structured, our preference programs work against

that goal as well as work against America’s own trade negotiating

objectives. Both my own experience as a trade negotiator and the

economic evidence to date reinforce the conclusion that our preference programs have, in practice, eroded the incentive to negotiate

further trade liberalization among a number of rapidly rising developing countries. Indeed, the Doha development agenda has, in part,

foundered on precisely that problem.

As a remedy, I would suggest a 6-point agenda for achieving our

trade and development goals. First, I would recommend the committee expressly limit the availability of our preferences to the

least developed countries in the world. I would suggest adopting a

single set of conditions that apply to both our preference programs

and our development assistance, conditions that focus on eliminating the barriers the poor face in gaining access to markets, both

locally and globally, both as consumers and as producers.

Third, we should create a single process for consideration of potential beneficiaries, both for our preference programs and for our

development assistance. We should gear our development assistance toward individual entrepreneurs rather than governments,

particularly where it would help connect them to global supply

chains that form the basis of competition in the global economy.

8

Fifth, we should gain greater operational consistency by combining the administration of our preference programs with our development assistance programs.

Sixth, I feel we should adopt a broader trade policy approach

consistent with delivering on the promise trade holds for the poorest in the world. Toward that end, I would recommend a grant of

negotiating authority to the President to, number one, negotiate a

free trade area within the WTO among developed countries willing

to move rapidly toward that goal in order to offer the broadest possible market opportunities not only for our exporters, but also for

firms and workers in the least-developed world.

I would also suggest, number two, that we harmonize our preferences with our developed country trading partners so that entrepreneurs building businesses in Africa, in Asia, and Latin America

would know that they could sell as easily in Athens, Greece as they

could in Athens, GA.

Thank you.

The CHAIRMAN. Thank you very much. That was very helpful.

[The prepared statement of Mr. Aldonas appears in the appendix.]

The CHAIRMAN. Mr. Gresser?

STATEMENT OF EDWARD GRESSER, DIRECTOR, PROJECT ON

TRADE AND GLOBAL MARKETS, PROGRESSIVE POLICY INSTITUTE, WASHINGTON, DC

Mr. GRESSER. Thank you very much, Mr. Chairman. Let me echo

Grant’s comment on Trade Adjustment Assistance. I think the committee really deserves some praise and thanks for its work on that

issue.

Let me make three basic points. First, I believe trade preferences

over the last 30 years have made a very valuable and important

contribution to American trade policy and to some of our national

security goals. They cover a modest fraction of trade, roughly 2 percent of non-oil trade, or roughly 4–5 percent if one includes energy.

But, within this small scope, they have done some important

things: the Caribbean Basin Initiative in the 1980s and 1990s

helped Central America restore its economic stability and recover

from the era of wars and guerrillas and death squads at that time.

The AGOA program has helped Lesotho and Swaziland, very small

and poor countries hit hard by HIV and AIDS, as well as Madagascar, to employ thousands of women in garment industries. Andean program flowers are a major job opportunity for Colombians

and for Ecuadorans, especially in rural areas.

And many middle-income and lower-income countries—Paraguay,

Thailand, India, Armenia, the Philippines, Indonesia, Turkey—rely

very heavily on GSP for competitiveness in light industry vis-a`-vis

China. They are not substitutes for multilateral liberalization, nor

are they guarantees of export success for beneficiaries, but, as

these examples show, they are an important part of American

trade policy. They have contributed to development, and they have

made an important contribution to security as well.

Looking ahead though, I would say they face two significant challenges. One of these is geographical. The preferences offer relatively little benefit to least-developed countries in Asia and the

9

Pacific and they do not offer much benefit to some of the large

majority-Muslim countries that are at the heart of our largest national security concern.

Here we could cite Cambodia as a good example. Cambodia’s

clothes face some of the highest tariffs we have in our schedule.

Last year, Cambodia’s $2.4 billion in exports faced a $419 million

tariff penalty. This is a larger tariff penalty than the $412 million

that British goods faced, and those totaled $57 billion altogether.

Pakistan is in a similar state, Bangladesh is similar, and Nepal as

well as a number of other small, low-income countries that are important to us for a variety of reasons.

Here, I would like to note and applaud two proposals, one by

Senator Smith and Senator Feinstein, the Trade Act, and one by

Senator Cantwell and some others to provide a special benefit for

Pakistan’s border regions and Afghanistan.

The other challenge is in policy. Some countries, I believe, could

use their preferences more effectively with better technical support

and capacity building. Here I would point in particular to Africa,

where a number of countries are struggling with inadequate infrastructure and port management. A number of countries could be

selling non-import-sensitive agricultural products to the U.S. if

they had better support and advice on sanitary and phytosanitary

standards.

On a deeper level, I would say three of the programs—AGOA,

CBI, and ATPA—are struggling. If you look at their share of the

American clothing markets, their share is going down. It is not

only going down by share, but by absolute exports. So, despite the

extensive benefits these programs offer, the beneficiaries are not

using them as well as one would have hoped.

My hypothesis is that the unusual qualifying procedure for

clothes, known as the Rule of Origin, may be at the heart of this

problem, because we can see the same thing happening in our

FTAs. The GSP system is less extensive and covers fewer products,

but the beneficiaries seem to be holding their share of the market.

In the regional programs for clothing, they are losing their share

of the market.

This, I believe, is because, in order to qualify a T-shirt or pair

of pajamas, most of the beneficiaries have to show that the inputs

came from particular places, from the United States, from internal

sources. I do not think this matches up very well with the multinational supply chains that most manufacturers use and that are

most convenient for retailers and buyers to use. If these programs

are to contribute in the future as they have in the past, I would

suggest that we need to look hard at these rules and maybe reshape them.

My final point is that these programs are not the world of trade.

Africa is struggling in its clothing exports. Africa, at the same time,

is surging in its other exports to the world. Since 2002, the African

continent’s exports have grown from about $140 billion to about

$420 billion, led by energy and metals and so forth.

I would suggest that it is time for us to work with the African

countries to see how this influx of cash can be used to fix some of

the infrastructure problems and capacity problems that have made

trade difficult for Africa.

10

Let me close there. Once again, I thank you very much for your

invitation and for holding this hearing today.

The CHAIRMAN. Thank you, Mr. Gresser, very much.

[The prepared statement of Mr. Gresser appears in the appendix.]

The CHAIRMAN. Fr. Small?

STATEMENT OF FR. ANDREW SMALL, FOREIGN POLICY ADVISOR, UNITED STATES CONFERENCE OF CATHOLIC BISHOPS,

WASHINGTON, DC

Fr. SMALL. Good morning, Mr. Chairman, Senator Grassley, honorable members of the committee. I would like to begin by offering

my condolence, and those of the Bishop’s Conference, to the Senator and the people, particularly those who lost loved ones very

abruptly and tragically.

The Bishop’s Conference is grateful for this invitation to offer

testimony on oversight of trade preference programs. The notion of

preference itself, the subject of today’s hearing, is one that lies at

the heart of the church’s vision for economic activity in which rules

governing economic life can, and should, be designed so that the

dignity of all, especially the poor and vulnerable, is respected.

Promoting development among the world’s poor nations was a

priority at the dawn of the world trading system, and this squares

well with the Catholic tradition where the economy exists to serve

people and not the other way around.

Pope Benedict XVI, a recent visitor to our Capitol city, reiterated

this call only last week, speaking about the need for globalized solidarity as the global hunger crisis worsens. Our entire body of

bishops offers the following advice, as they do every 4 years. This

year during this election season they say, ‘‘While the common good

embraces all, those who are weak, vulnerable, and most in need deserve preferential concern.’’

The committee has heard from several experts on the current

state of U.S. preference programs. I would like to highlight the impact of these programs on two of the poorest countries in our own

hemisphere, Haiti and Bolivia.

Church leaders from both countries visited Washington to speak

about the need to both expand and strengthen these programs, and

we are grateful to you, Mr. Chairman, Senator Grassley, and the

committee for the support that you have given to these programs.

Haiti, as we all know, has known a great deal of hardship. In the

early 1980s, employment in the apparel sector began to decline,

from 100,000 jobs to around 15,000 by 2004. Since the U.S. began

implementing the HOPE Act of 2006, Haiti has recovered approximately 5,000 jobs. This achievement is modest, but it is especially

important for people like Carle`ne, a mother of two who lost her job

in October of 2006. With new orders coming in because of HOPE,

Carle`ne started working again in January of this year. The same

is true for Samuel, a father of two, who like Carle`ne now gets his

paycheck every 10 days.

Arnelle received computer training after she lost her job in 2006,

and her training was paid for by remittances sent by a family living in the United States, so preference programs actually help people remain in their home countries and resist the push to emigrate.

11

These kinds of jobs, on average, earn about $5 or more a day, and

while this might seem incredibly low it is 4 times the country’s per

capita income and enough for a family to pay for food, shelter, and

clothing. So, as well as meaningful preferences, these programs

need to be reliable.

On a visit to Washington last February, Cardinal Terrazas from

Santa Cruz, Bolivia urged long-term extension of the preferences

Bolivia receives under the Andean Trade Promotion Drug Eradication Act (ATPDEA), and he reported how much these U.S. preference programs are known by the Bolivian people and are valued

by ordinary Bolivians, many of whom depend upon them to develop

viable alternatives to coca production.

Of course, trade policy needs to promote more than economic

growth, and that is why USCCB has urged a strong link between

trade and human rights, including labor and environmental protections, access to lifesaving medicines, and respect for freedom and

democracy.

As the global economy integrates, USCCB, the Bishop’s Conference, urges lawmakers to prioritize the rights and dignity of

workers at home and abroad, taking meaningful steps to help those

in the U.S. who lose their jobs because of globalization.

There is a Haitian proverb: ‘‘Beyond the mountains there are

more mountains.’’ It refers to the peasant farmer’s dream of neverending lands yielding bounty upon bounty. But for many, the path

to a better life is blocked by insurmountable obstacles.

U.S. preference programs make straight the path for poor country exports, and they offer a unique way for countries like the

United States to build global solidarity using trade laws to privilege the powerless. They bring hope and life to millions of people

like Carle`ne, Samuel, and Arnelle, and for that I would like to say

thank you.

The CHAIRMAN. Thank you, Father, very much.

[The prepared statement of Fr. Small appears in the appendix.]

The CHAIRMAN. I would like to ask the four of you, what are the

top three changes that you think we should make to the current

preference programs? We will go down the table here. I do not have

a lot of time here. I have about 41⁄2 minutes left. So could you just,

very briefly, like one minute?

Dr. YAGER. All right. Mr. Chairman, I think we made a couple

of specific recommendations in our reports to USTR to align the reporting of the results of these programs, as well as to look for different ways to ensure that the review of different countries—for example, in GSP—is more uniform than it has been in the past.

I think there are also opportunities for the Congress to help align

the goals of these programs and to simplify them, not necessarily,

as Grant said, along with other countries, but even within these

programs to ensure that they are not working at cross purposes.

Because, for example, some countries now might not choose to be

reviewed for AGOA or may not be eligible, they may in fact be still

eligible for GSP, which could be at cross purposes with the goals

of the programs.

The CHAIRMAN. So more reporting, more alignment, more accountability, basically?

Dr. YAGER. That is correct.

12

The CHAIRMAN. All right.

Mr. Aldonas?

Mr. ALDONAS. The first thing I would do is limit them to the

least-developed in the world, the poorest who need the opportunity.

We are now living in a world where the more advanced developing

countries have access to investment capital that the least-developed do not. In that world, they do not need the preferences any

longer, number one.

The CHAIRMAN. So who would you cut off?

Mr. ALDONAS. Brazil. Zimbabwe. Venezuela. There are a host of

countries that either are not doing the things they need to do domestically to allow the preferences to work, or frankly, they work

against the broader effort to liberalize trade that would benefit the

least-developed countries.

The CHAIRMAN. So you would shift away from the more developed and focus much more on the least-developed.

Mr. ALDONAS. Absolutely. It increases the preferences that they

benefit from if you focus on the least-developed countries.

The CHAIRMAN. Go ahead.

Mr. ALDONAS. The second thing is a single set of criteria that focuses on developing markets domestically in the developing countries. The third thing is that we should put the money on the table

with our trade preferences. We really should come to the table,

both with our development assistance budget and our preferences,

when we sit down to talk with countries and we should say, look,

let us understand what you need in the way of infrastructure to get

your goods to market, let us build those markets with you domestically, and let us find a way to help you link those markets to the

global economy, which is what our preferences do.

The CHAIRMAN. All right.

Mr. Gresser?

Mr. GRESSER. I would say, try to fill the gap for the least-developed countries in Asia and the Pacific and the Muslim world. Two,

improve development assistance and capacity building for Africa.

Three, probably make the programs a bit longer and with more

synchronized renewals.

The CHAIRMAN. What would you do about the eligibility criteria?

To what degree do we know that the countries who participate are

focusing on those, that those conditions are being met?

Mr. GRESSER. I think we could probably do a better job in weeding out genuinely bad actors. Grant mentioned Zimbabwe and Venezuela as kind of odd beneficiaries of these programs. I would say

also that we should have a shorter and less complicated list of eligibility criteria than we do now because, the more you create very

specific and multiple categories and reasons for eligibility or noneligibility and the more you create very detailed limits on the type

of products that can be imported under these programs, the harder

they become to use and the less valuable they become to the beneficiaries.

The CHAIRMAN. All right.

Fr. Small?

Fr. SMALL. Just agreeing with a lot of what my colleagues have

said, but it just seems such a difficult thing to try to figure out,

which is why we tend to talk about it on a case-by-case basis. AssoVerDate 11-MAY-2000 14:04 Aug 06, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 57557.000 TIMD PsN: TIMD
13

ciating worker protections and labor provisions as we did with the

recent HOPE II Act, I think, was a great way forward. Maybe increasing that so that it is more capacity building around labor

rather than, there is always the carrot and the stick. I think the

carrot will probably work if we focus on those countries that, as

Grant says, should be focused on, which are the least-developed

countries.

The CHAIRMAN. So do you all agree that we should begin to limit

some of the more developed countries and focus more on the leastdeveloped? Does anybody disagree with that basic point?

Fr. SMALL. I suppose the conference could not go on record as

saying who should not get the preferences.

The CHAIRMAN. Right. Right.

Fr. SMALL. We generally say who goes to heaven, but we do not

say who goes to hell. [Laughter.]

The CHAIRMAN. Right. I am not going to touch that one.

Fr. SMALL. Not even Martin Luther got that.

The CHAIRMAN. What about India? Does anybody have a view

about India?

Mr. ALDONAS. Yes. India was the principal obstacle, frankly, to

the launch of the round in Doha. India is the principal obstacle

now in terms of actually concluding the round. Any movement at

all in terms of goods and services can make a significant contribution to liberalization, not only for the benefit of American exporters, but for the poor in the world.

The CHAIRMAN. My time is expiring, but just one question. What

are the potential unintended adverse consequences of starting to

phase out the Indias and the Brazils of the world? What are the

consequences of doing that?

Mr. GRESSER. Well, most of the goods, particularly under India’s

GSP, are non-import-sensitive. If India’s privileges are limited,

they will drift off to China, Vietnam, or some other country. India

is a large, rapidly developing country, but it is also a very poor

country, with a $700 or $800 per capita income. Many of the people

who work in the GSP industries in India are low-income women

whom I think deserve and need some support.

The CHAIRMAN. Thank you very much.

Senator Grassley?

Senator GRASSLEY. Yes. Thank you very much.

Mr. Gresser, I think you wrote about something I want to ask

you about, so not a very specific question, but your views. This is

where I am coming from, because I have noticed that some of the

strongest congressional supporters of preference programs also oppose negotiating new trade agreements. That is puzzling to me. It

seems to me that liberalizing trade is a powerful tool for helping

the poor in other countries, and GSP is one example of trying to

do that. When folks oppose greater trade liberalization, they are

hurting the poor, not helping them. Your views?

Mr. GRESSER. Well, among the group of people who are supporting preferences and are unhappy with trade agreements, I

think there are probably a range of views. I do not presume to

speak for them, particularly for people in Congress, but there is a

group of people who feel that the FTA asks too much of low-income

countries. There may be people who place kind of very high reliVerDate 11-MAY-2000 14:04 Aug 06, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 57557.000 TIMD PsN: TIMD
14

ance on conditionalities and the potential of withdrawing benefits

as a way to influence the policies of beneficiaries.

In my experience, this is not as easy to do as one might think

at first glance, but maybe those are some of the explanations. I do

agree with you that liberalizing trade has been a real benefit for

the poor in the world. Last year, Muhammad Yunus from the

Grameen Bank testified to that. I think his words were very eloquent and well worth recalling.

Senator GRASSLEY. Mr. Yager, last year the administration revoked Competitive Need Limitation waivers for eight super-competitive products under GSP. The purpose of the revocation was to

provide additional import opportunity to other beneficiary countries. Your testimony mentioned that beneficiaries of GSP will not

necessarily profit from another country’s loss of preference. However, I feel we have some trade data suggesting revocations were

a success.

To just give an example, imports of gold jewelry are rising from

other GSP beneficiary countries, as well as from our free trade

agreement partner, the Dominican Republic. I expect that the administration will continue its efforts this year and revoke waivers

on super-competitive requirements set out in the law. In any case,

then how do you respond to the trade data, assuming I read the

trade data right?

Dr. YAGER. Yes. Senator Grassley, I believe you are correct. I am

familiar with one particular case where a Competitive Need Limitation on gold jewelry—I think it is the one you mentioned, that

was certainly an unusual case because the volume that was being

shipped under the waiver—by India, I believe—was over $2 billion,

and so more than 10 times the threshold that normally would push

a country’s product out of the GSP program.

So it certainly is no surprise that, when you have an exporter

like India that is pushed out of that kind of a volume of trade, that

the benefits would be widely distributed across both preference

beneficiaries, free trade partners, as well as other countries around

the world.

I think it is a very useful exercise to go through and look to see

what the effects of these revocations of the waivers are, and so we

can actually do a little bit more and communicate with your office

on that, because we think it is useful to see what happens in these

cases.

The case that you mentioned, gold jewelry, though, was certainly

one where there were a great deal of shipments under that program vastly in excess of the CNL limits, so it is not surprising that

those benefits were spread around the world.

Senator GRASSLEY. I presume then that you feel that we do not

have enough trade data to justify a very sweeping opinion in that

direction?

Dr. YAGER. Well, I think what we wrote in the testimony was

that there is no guarantee that the benefits will go to other preference beneficiaries, so I think that, by looking at the data, it is

certainly a good way to determine whether, in fact, it occurs in that

way. So we think it would be a very useful exercise.

Senator GRASSLEY. All right.

15

On another point, Grant, you suggested in testimony that we

should ask beneficiaries of preference programs to create conditions

for markets to flourish. For example, you mentioned private property rights for the poor and the needs to ensure enforceability of

contracts. Are you suggesting that we should require countries to

implement these types of reforms as a condition for receiving preferences?

Mr. ALDONAS. Thank you, Senator Grassley. That is exactly what

I am suggesting. In the absence of those domestic reforms that

allow individuals in the developing country to engage in that simple human freedom of exchange, there is not much hope for economic development, number one.

The other thing is, those rules are also consistent with creating

contestable markets in which our exporters can compete fairly, so

it helps both in terms of development, as well as our own commercial interests.

Senator GRASSLEY. All right.

Senator Baucus asked me to call the next person on the list, and

that is Senator Bingaman.

Senator BINGAMAN. Thank you all for being here.

Mr. Yager, let me start with you. I have thought for a long time

that one of our problems with trade generally is that we do not

properly staff up the U.S. Trade Representative’s office to do all the

things that we require them to do. Accordingly, their priority has

been to get more agreements signed. There is not enough time, not

enough people to properly monitor what we already have in place.

Your comments about how these programs are not properly monitored, not properly reported on, all of that. Am I right that this

is a symptom of the larger problem, that we are not properly staffing, not adequately resourcing our Trade Representative’s office?

Dr. YAGER. It is certainly related to that point. For example,

there is an annual review under the AGOA program in which each

country is looked at each year. On the other hand, in the GSP, it

can be many years between program reviews for individual countries. In fact, many of the countries in the GSP program have

never been reviewed.

So when we talked to the Trade Representative’s office, one of

the things that did concern them was the work and the amount of

effort necessary to go through the entire list of GSP countries on

an annual basis. They looked at that as quite a daunting task. So,

there are issues related to the requirements and the expectations

on USTR and the staffing that they have to try to comply with congressional interests.

Senator BINGAMAN. Mr. Gresser, you point out here that in 2007

GSP covered $30.8 billion in goods, or $20.3 billion in goods, excluding oil. Why are we including oil in this? I mean, I have real

trouble understanding given the demand for oil today, which we

see reflected every time we drive up to the gas pump. Why do we

have to give particular countries a preference to import oil into this

country?

Mr. GRESSER. Senator, I cannot see any good reason for it. The

tariffs on oil are small, specific duties, typically a quarter, a nickel,

or fifty cents per barrel. I do not think they have any noticeable

16

effect on trade. I think it is not really meaningful to include them

in these programs. They should probably not be included.

Senator BINGAMAN. And is oil the main one or are there others

that you would put in that same category? It just does not make

any sense. I mean, the people producing oil or companies producing

oil in these countries are not giving work to low-income people who

otherwise would have no income as a general matter.

Mr. GRESSER. Yes. That is a very good point. We would be importing it no matter what in either case. There may be some other

natural resource products in a similar state. I would have to look

at the schedule. But I think oil is the big one.

Senator BINGAMAN. All right.

Mr. Aldonas, let me ask you here, the business of coordinating

our development assistance and our trade preference policies

makes a lot of sense to me. I think Dr. Yager talks about the fact

that we do not have this linked to capacity building. How do all

those three fit together? I mean, what are we talking about by way

of capacity building that is not included in what you are describing

by way of development assistance? Or maybe it is all the same

thing.

Mr. ALDONAS. That is a great question. The world we are living

in is really driven by competition among supply chains, and it

would be useful to take that mode of thinking about the world and

apply it to what we do from a development perspective, because

what you will identify is what kind of domestic reforms you need

inside the country to ensure that it has a vibrant market domestically. You will see what the infrastructure problems are to be able

to link that to a global market, and you also identify the external

barriers that those exports face, which is really what our preference programs address.

So, in one sense, you would be mirroring precisely what the buyers of the goods that Ed was describing look at when they ask, ‘‘Am

I going to source in a place like Cambodia?’’ The financial part of

it is to ask, ‘‘How do we finance the infrastructure, both human infrastructure, institutional infrastructure, and physical infrastructure to allow this to happen?’’

So, ultimately, if you want to line up both our development assistance and our preference programs with the way the world

works in the global economy, the best thing to do is to take that

methodology and apply that analysis and really set a single set of

criteria that would apply to both so, when you come to the table

with a least-developed country, you have the opportunity to talk

both about the money and about the preferences.

Senator BINGAMAN. My time is up. Thank you, Mr. Chairman.

Senator GRASSLEY. Next on the list is Senator Smith.

Senator SMITH. Thank you, Mr. Chairman.

Ed Gresser and Grant Aldonas, a number of members of the committee have introduced different types of models of trade preferences. Senator Feinstein and I have introduced legislation that

would extend AGOA-like benefits to developed countries throughout Asia and the Pacific. I know others have models that are more

targeted to areas within those areas.

I wonder if you could briefly discuss the pros and cons of both

models and how business and investments respond to the two. Is

17

there a better way or preference that you have as between these

two types?

Mr. GRESSER. Just so I understand this correctly, a broad benefit

for least-developed countries in general or a targeted——

Senator SMITH. Well, Senator Feinstein’s and my bill for leastdeveloped countries targets an entire region. For example, I think

Senator Cantwell and Senator Hatch have one more targeted within a specific area within a country. My question is not a criticism

of either, but really more a question of which is getting a greater

response in terms of investment and business activity.

Mr. GRESSER. Well, I have thought, and PPI has advocated, a

broad kind of benefit for the Muslim world and for least-developed

countries. Senator Cantwell’s bill covers Afghanistan as a whole

and the border areas of Pakistan. If you could successfully bring

jobs and growth to those regions, the northwest frontier, and so on,

that would be a major contribution to American security. I guess

I do not see the two in conflict. I see them as both good ideas and

complementary, especially in that Pakistan is not a least-developed

country and does not have a very meaningful benefit right now.

Senator SMITH. The fact is that Pakistan does not qualify under

the bill that Senator Feinstein and I introduced, but the truth is,

its economics are just slightly above those of Cambodia, which does

qualify. I wonder if you can give me an update on, what is the state

of Pakistan’s apparel industry and what benefits you see. Obviously you have cited national security, but are there other benefits

that come from helping them in this regard?

Mr. GRESSER. I think from our perspective the big benefit is national security. Pakistan is at the center of our largest current concern. In a social sense, I visited Karachi, walked around the area

where they have the textile industry. You can see many young, 20-

or 30-year-old Pakistani women coming to work wearing black, and

pink, and red, and yellow clothes—a very colorful sight. This is one

of the relatively few opportunities for Pakistani women to become

self-sufficient, to build up some savings, and I think, has a social

benefit, especially for a large and quite conservative Muslim country, that we should not ignore.

Senator SMITH. And I think one of you mentioned, they are very

mindful that they have these opportunities for these jobs because

of the United States offering these trade preferences.

Mr. GRESSER. I would hope that they are. I have read and talked

to Pakistani people who say, each container full of towels sent to

the United States—very simple, cheap goods—puts 500 Pakistanis

to work, takes people out of madrassas, takes them out of sitting

around in village squares, and I think can help on a large scale to

bring down the social temperature and make some of our political

goals easier to achieve.

Senator SMITH. I know this is about trade preferences, but Senator Cantwell and I have a bill that is related to affordable footwear, for example. Many parts of the world still have duties of 67

percent that relate back to the days of Smoot-Hawley, and it was

designed in Smoot-Hawley to protect an industry that, frankly, no

longer exists in our country at much of a level. Our bill is actually

supported by the remaining American shoe manufacturers.

18

I wonder, as you look at kids going back to school in a few

months when families are going to have to buy them new shoes,

would it not be advisable to pass this Affordable Footwear Act now

so that the poor in those countries get the benefit and those who

are less-advantaged in our country get the advantage of the footwear that is not produced here?

Mr. GRESSER. A very good idea.

Senator SMITH. I like your answer. [Laughter.]

Mr. GRESSER. One of the interesting things about our tariff system is that its highest rates are on clothes, and luggage, and shoes,

those manufactured goods. Particularly in shoes and luggage, there

are very few made in the U.S., and very high duties. Those two

products account for about a tenth of all tariff money and probably

cost families $5 to $8 billion a year.

The highest duties, as you mentioned, are on the cheapest sort

of shoes, which are most important to poor families. There are none

made in the United States. It is really worth a look. The question

is, why do we do this? What is the point? So, I applaud your bill.

The CHAIRMAN. Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman. And thank you so

much for having this hearing. I would ask if I could submit a

longer statement for the record about the GSP system, and on legislation you mentioned.

The CHAIRMAN. Without objection.

[The prepared statement of Senator Cantwell appears in the appendix.]

Senator CANTWELL. I appreciate that. Some of my colleagues

have already talked about creating a Reconstruction Opportunity

Zone within Pakistan and Afghanistan.

As my colleague from Oregon said, the Northwest kind of looks

at this issue in a broad perspective. Trade has been an important

part of our economy. But it was after 9/11 that a group of constituents—Bill Gates, Sr., former U.S. Senator Dan Evans, General

John Shalikashvili—formed what was known as the Initiative for

Global Development. Their focus was basically at the root of global

poverty, if we could address that, that it would be a critical factor

in addressing our security as a Nation.

So, Mr. Chairman, I would also like to add to the record letters

submitted from Secretary of State Condoleezza Rice, the Afghan

and Pakistan Ministers of Commerce, and also letters submitted by

former Ambassador Richard Holbrooke and 9/11 Commission Chair

Lee Hamilton.

The CHAIRMAN. Without objection.

[The letters appear in the appendix beginning on p 51.]

Senator CANTWELL. Obviously you have already started discussing this notion of what we can do in these communities of the

tribal region of Pakistan and Afghanistan. I guess I am curious,

Mr. Gresser, to go on further about this, because obviously we have

a drug problem in Afghanistan. I am told by businessmen and

women in the Pakistan area that they would use the money benefit

of this to actually send children to school.

So I do not know what your feelings are about the secondary benefits of this and being able to bring up a higher standard of living,

of education, from the business development that is happening. If

19

you could comment on that, and any comments about the drug

problem and how this will help with Afghanistan.

Mr. GRESSER. Well, I am afraid the drug problem is a little bit

out of my expertise. I will defer to others on that. But when one

region or part of a country develops successful businesses and the

local government begins to collect taxes, public services can improve, education can improve.

You will have more women working in factories, and that will

create, I think, a climate in which education for girls is more widely supported and accepted. So I think these are very good aspirations, and with your bill, I think we have a better chance of success

with them.

Senator CANTWELL. Does anybody else want to comment on that?

Dr. YAGER. If I could just make a comment about this. I mean,

one option would be to look at Colombia for the lessons that we

might learn there, because obviously a big part of the ATPA was

to encourage agriculture, alternative forms of agriculture to give

people opportunities out of the illegal sector.

We certainly have observed that, in the area of cut flowers, there

is significant employment growth among people within Colombia,

so there are examples in which the preference programs have sent

a signal, both to the country as well as investors, to invest. Of

course, the investment then would create the opportunity for jobs

and, of course, exports back to the United States.

So, perhaps a look at the Colombian experience would provide

some insights into the ROZ options that you are putting forward.

Senator CANTWELL. That is a good point. I traveled to Colombia,

at the chairman’s suggestion to do so, and I did tour that flowergrowing region and the facilities and some of the additional benefits of job training and education that are accruing to that workforce. So, we will look at that.

Mr. ALDONAS. Senator, if I could just add in response, business

and employment contribute to stability, and there is a tremendous

spill-over effect in terms of societal benefits, and that ought to be

the goal of everything we do, both in terms of preferences and in

terms of development assistance. I did not get a chance to respond

to Senator Smith’s question, but I do not see your proposal and the

proposal for the least-developed as inconsistent. In fact, I think

they reinforce one another.

But, you have to get out of the mind-set that development is

something that takes place only within the confines of a geographical border designated as a country. You have to sort of grapple with the fact that you have regions that are under-developed,

and we might want to focus on that. This is a proposal that would

allow us to do that for the first time, in many respects.

Senator CANTWELL. Thank you.

And thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Cantwell.

Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman.

Mr. Aldonas, I am interested in your testimony that the availability of trade preferences is eroding the support of certain developing nations toward more comprehensive bilateral and multilateral trade agreements. You mentioned India, in particular. Why

20

should we continue to extend these programs if they are barriers

to promoting bilateral trade agreements?

Mr. ALDONAS. I think, particularly for the rising export powers,

you have the equation exactly right, Senator Bunning. The truth

is, for those countries, you actually want an incentive for them

to engage in full liberalization. It is actually in their economic interest and it is also in our economic interest. So, ultimately that

is why I would like to see these things focused on the leastdeveloped.

The other point I would make is, in today’s world, the preferences were originally a way of trying to attract investment capital to very poor countries. There is no doubt in India, China,

Brazil, as you go down that list, they have plenty of access to global capital flows at this point. There is lots of private investment in

each one of those economies. You do not need the additional incentive of the preference.

Senator BUNNING. All right.

This is a question for the entire panel. Last summer, the IMF

issued a set of objective criteria to evaluate whether a country is

manipulating its currency to gain a trade advantage. The example

of China, which now has close to $2 trillion in foreign reserves, is

encouraging other developing countries to use the same techniques.

The Port of Los Angeles is busy all day emptying thousands of

cargo containers from China and shipping empty containers—

empty containers—back from Los Angeles.

When we reauthorize GSP, should we consider currency manipulation as a disqualifying factor? Any of you.

Mr. ALDONAS. I would say what you would want to do is ensure

that the operation of their capital markets reflected the market,

and that is broader than just the foreign exchange rate. But, ultimately you want to have conditions in the domestic market that

give you some assurance that people there have the opportunity to

invest fairly and engage in exchange, and that we have the opportunity to link them to global markets. Part of that is making sure

you have the rules right in the capital market, as far as I am concerned.

Senator BUNNING. Well, there is no question in my mind that

China passed the right laws and rules to engage in the WTO, but

they are not enforcing them. Therefore, if a country is not enforcing

the laws that make the playing field level, why should we give

them preferences?

Mr. ALDONAS. I appreciate what you are saying. I think the problem is more fundamental, that the demands that we made in the

context of the WTO accession agreement on financial services, in

large part, are because the financial services community was not

very demanding and were inadequate to ensure that you have a

functioning capital market in China. Until you have a functioning

capital market in China, you will see all sorts of distortions in their

economy that spill over our way as trade problems. They metastasize because of the lack of a functioning capital market.

That is one of the essentials, whether you are talking with the

Chinese under our anti-dumping laws about whether they are a

market economy or whether it is in the context of preference programs. I think you always want to insist that one of the things that

21

we are trying to create, for their own benefit, is a functioning capital market.

Senator BUNNING. Would anybody else like to comment on that?

Dr. YAGER. If I could make a brief comment on that, Senator

Bunning.

Senator BUNNING. All right.

Dr. YAGER. I think one of the things that we are suggesting that

USTR do is make a more conscious decision about eligibility of

countries, whether it is on an annual basis or on a number-of-years

basis. We think it is important that they make an actual explicit

decision about certain countries, whether it is for movement towards a market economy or whether it is to comply with other U.S.

priorities such as IPR rights, human trafficking, or things of that

nature.

I think the point that we would like to make to USTR is that

there should be a decision, if not every year, at least on some period of years, so that considerations can be discussed. There may

be different considerations for different countries and different regions, but at least there is a discussion about it and there has been

a decision made.

The example of Zimbabwe came up earlier, that those are the

kinds of things that would provide an opportunity to ask questions

about their performance on different aspects, not necessarily currency in that case, but on other things that are important to the

United States.

Senator BUNNING. This is a follow-up, because I only have about

10 seconds left. When we reauthorize GSP, should we reevaluate

the criteria for graduating countries from the GSP program?

Mr. ALDONAS. In my view, absolutely. I think one of the things

you want to be looking at is the extent that they still need the preference to attract capital, which was the original goal, to attract investment capital. That is part of why I think you ought to have

that single criteria that applies both to what we do on the preferences side and what we do with respect to our development assistance.

Senator BUNNING. Yes, sir?

Mr. GRESSER. I think, on the whole, I am pretty satisfied with

the graduation criteria. Malaysia, Korea, and Hong Kong have

moved on as time passes. I think I am not quite so alarmed about

this as Grant would be.

Senator BUNNING. All right. Thank you very much.

Senator LINCOLN. I think it is my turn.

Well, I want to thank Chairman Baucus and Senator Grassley

for holding this hearing, and thanks to all of you all. Welcome

back, to many of you.

I have said it time and time again in this committee room: I am

certainly a supporter of free trade. It is not hard to point to the

benefit that trade has brought to my home State of Arkansas. We

certainly, on behalf of agricultural products and others, want to

make sure it is fair trade.

But Arkansas is also home to Wal-Mart, a business with one of

the most sophisticated sourcing operations in the world. It has created countless new jobs and opportunities around the globe, as well

as, focusing now domestically, sustainability and a host of other

22

things that they have done a tremendous job on. Row crops, livestock, and poultry producers help feed the world, when they can

get into those markets. Our steel producers have built some of the

most efficient and effective environmentally friendly steel mills in

existence today in Arkansas.

So just as trade has benefitted our State, granting less-developed

countries greater access to our markets can, I think, be one of our

more powerful tools in order to help alleviate poverty by creating

those opportunities for entrepreneurism and investment. Our trade

preference programs are great examples of how we can provide

countries a hand up, and I think many of you all have really contributed to that in today’s hearing. We appreciate your being here

and your testimony and bringing forth those, or certainly examples

of those, ideas.

It has also added foreign policy benefits of fostering political and

economic stability, and as you all have mentioned, creating goodwill for the United States, shoring up relationships with important

allies.

I know, just mentioning some of what Senator Cantwell talked

about, I, too, visited Colombia. Being able to not only visit and experience what the military there, along with our military and the

assistance of our aerial applicators, have been able to go in and do

with the military in Colombia, dealing with how they go into the

drug areas, and the use of canines, has been phenomenal. But we

have used a lot of that now as well in Iraq where we have been

looking to locate IEDs and a whole host of other things. So it has

been something that, when we engage, it provides us mutual information.

You mentioned the flower industry. I, too, toured one of the

farms, without a doubt providing jobs and additional agricultural

industry, but it also was a relocation program for victims of violence, to be able to move out of a violent area and move into a sustainability situation. There is tremendous support for that in those

countries, and I really attribute a lot of the progress that we have

made in that to those types of programs that have been fostered

through the trade that we have really tried to encourage.

I would like to just quickly ask a couple of questions. Mr.

Aldonas, I have been very interested. You have talked about expanding our preferences to the least-developed countries and really

focusing on that. Do you have a thought, or maybe an experience

or something in terms of explanation, that really led you to that

conclusion? I mean, you have talked about what it means, I know

that. But I am just wondering if there is one specific that really

kind of comes out in your mind.

Mr. ALDONAS. A couple of things. One is looking at Bangladesh,

which is one of the poorest countries in the world, and recognizing

that it suffers in competition with China and a variety of others in

turning a long staple cotton crop into goods that would benefit us,

benefit the rest of the world, and recognizing that they would benefit from these preferences but are excluded. So, that is one example.

The other one I would pick is this odd sort of anomaly whereby

limiting what we do on textiles under the African Growth and Opportunity Act, where, as Ed was pointing out, there are some sigVerDate 11-MAY-2000 14:04 Aug 06, 2010 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 57557.000 TIMD PsN: TIMD
23

nificant constraints on the rules of origin. It actually ended up in

some respects not building a strong enough industry, and as a consequence Chinese exports are now out-competing local production

in Africa.

So, in one sense, what we did—and I was a part of it, I admit

it—in drafting those rules of origin was create something that did

not give them the edge that would allow them to sustain their competitiveness in their own market, much less in markets abroad.

If I could just add, Senator Lincoln, I used to kid Lee Scott and

Mike Eskew that in today’s world, that Wal-Mart represents the

Agora, the old Greek market, where everybody had to bring their

goods on a donkey, and UPS represents the donkey. [Laughter.] In

this world, it would be very useful to take what Lee and the folks

at Wal-Mart have done, take a look at their sourcing model and

think about our preference programs from that angle, because it is

actually a wonderful way of saying, how would I set the incentives

so people can participate and bring their goods to the Agora?

Senator LINCOLN. Yes. The last question I have, because my time

is about up and we will probably finish up the hearing, but how

might USTR better coordinate with other agencies to improve trade

capacity in some of those less-developed nations? We talked a little

bit about USDA. My husband’s godfather, in the 1950s, worked for

USDA and was in countries like Afghanistan, Lebanon, and other

places, trying to have a coordinated effort of knowledge in terms

of agricultural practices and a host of other things.

Is there some way that USTR could better coordinate with other

agencies in terms of using benefits that would help escalate the development of industries in certain ways?

Dr. YAGER. Senator Lincoln, I think the answer is yes. In fact,

they have done so with regard to the AGOA program, because the

AGOA program does specifically link the preferences to capacity

building, but it is the only preference program that does that. Of

course, there are a number of other countries around the world outside of Africa that could use the type of trade capacity building assistance that is built in and is linked with the actual preference

program.

So there is probably both an argument for it, as well as some experience that might be gained from what the United States has

done through the AGOA program to learn a little bit more about

how that capacity building can be provided along with the preference programs to gain greater benefits.

Senator LINCOLN. I know there are a lot of different nonprofits.

We are the home in Arkansas to Heifer International, as well as

Winrock International, both of which teach an awful lot about

microeconomics and entrepreneurship and building those kind of

industries from the very small entity up. I am assuming that

USTR in some way connects with some of those; I do not know.

Mr. ALDONAS. Senator Lincoln, they do not. I actually chair one

of those institutions. Based on what I know about the preference

programs, we certainly take them into account deeply in terms of

the sorts of investment projects we would look at. It is without reference to any discussion with USTR or the sort of formulation and

administration of the preference programs, because there is not a

point of access that allows you to do that.

24

Equally important, there is no place where you can go in the U.S.

Government for a single conversation about an entity which is designed to finance cooperatives among small producers of asparagus

and figure out how to link them to General Mills. There is no way

to go and have the conversation. When you go talk to the Department of Agriculture and APHIS, which sets the standards, the

folks at AID and the Millenium Challenge Corporation (MCC),

which both have different operating rules, and USTR, what you are

going to end up with is dealing with four conflicting standards.

That is why I think one of the things you have to do is draw all

the threads together.

I understand it raises jurisdictional issues, but I know that this

committee has squared those jurisdictional issues in the past, particularly with respect to AGOA. But that is where I think the heart

of the problem lies, because it is a very difficult position to be that

provider as an NGO, to find one source, one consistent set of advice

and support for trying to draw the threads of finance and trade together.

Senator LINCOLN. Thank you.

The CHAIRMAN. Thank you very much, Senator.

Fr. Small, could you tell us a little bit more about your experiences in Bolivia, and also in Haiti? I would like you to focus on the

degree to which GSP and the Andean Trade Preferences Act is

really helping, say, in Bolivia and what effect it is having on people.

Fr. SMALL. Sure. Thank you, Senator. I was just going to tag on

the end—Senator Lincoln talked about Wal-Mart. I am just always

stunned why this is sort of the best-kept secret of our development

policy through our preferences at a time when trade is not really

seen as friendly to the U.S. economy, et cetera.

In a popular way it seems something that is inimical to economic

development, and yet our preference programs should be the flagship of how genuinely it is about development. If you take the case

of Bolivia, for example, even though there are some tensions, from

the reports that we get and from church leaders who have been

there, they are very literate in what this preference program

means to their people, certainly in La Paz and the western regions,

those areas that President Morales has spoken about as people who

need liberation, who need equality.

They actually provide some estimates up to 25,000 jobs; others

claim that it is much larger. In a very tense and difficult situation

in that country, U.S. trade preference programs are something that

stand as a beacon, at least, for the people, that they have assistance that is beyond traditional development assistance.

If you take that away or if that lapses—and I understand the

largest employer, a private employer in Bolivia, 45,000 jobs, has

started to move some of that production to Peru, given the uncertainty around the extension of those preferences. They have been

extended relatively short periods, which is deeply troubling and

sort of gives something of a propaganda victory to those who say

that this model of trade and openness and integration is not something that we should be pursuing, it is more about looking internally.

25

But if you think of the rest of the hemisphere, now that Haiti

has what it has, you think of the DR-CAFTA, you think of the CBI,

Bolivia would be left as pretty much the poorest country of the

hemisphere with nothing outside of GSP, which, as you said, when

you think of your neighbors who need a lift up, is that the signal

and the message we want to be sending at this time? So, it is deeply important. I just regret that we do not do a better job of showing

how valuable and important these trade preferences are domestically.

The CHAIRMAN. Go ahead.

Mr. ALDONAS. I just wanted to make mention, I think it is the

same individual, Marcos Iberkleid and Ametex, which does a lot of

the textile and apparel exporting out of Bolivia. They are going to

be forced to shut down in the absence of the preference program.

The reason I raised that is because that firm implements one of the

most forward-looking policies with respect to workers and worker

rights of anyone in the hemisphere.

The CHAIRMAN. What is the firm?

Mr. ALDONAS. It is Ametex. It is a remarkable story about how

the incentives—and certainly how Marcos thinks about our market—are responding and are making available rights to his workers

well beyond those that are guaranteed under local law. And so that

is exactly the sort of thing I think we would want to highlight and

reinforce.

The CHAIRMAN. Are there others on the panel who might want

to comment on the degree to which preference programs help the

United States’ business, United States’ consumers? Anybody want

to comment on that?

Mr. GRESSER. Well, all right. One particular product, roses and

flowers. Most of the flowers sold for Valentine’s Day are flown in

from Colombia and Ecuador. If the ATPA lapses or is cut off, their

prices will go up, people buying flowers for their wives and

girlfriends next year are going to be paying more money and probably buying fewer roses. There is a real benefit in there for ordinary people and for a bunch of florists whose businesses improve.

I think that is a very nice thing to do.

If I can make two brief comments about your last question. Haiti.

I was just there a few weeks ago. There are 8.6 million people.

They have 200,000 or so paying jobs. People in Haiti live very close

to the margin. About 20,000 of those jobs are garment exports to

the United States, and each of the workers there are supposed to

feed about 10 people in extended families in rural areas, and so on.

The other one is the Cambodian case. A big garment factory in

Cambodia can employ 4,000 or 5,000 young women. They wear little silver earrings and bracelets, which is how they save money, because they cannot get bank accounts most of the time. A factory

like that takes about 4 weeks to set up and 2 weeks to bring down

if they want to move to Vietnam or if they want to move to some

other country which is larger, which has a better port, those sorts

of things.

I think people in Cambodian government and business feel if

they had a good trade preference benefit they would be secure for

a while. They would allow the development of the last 10 years—

which has taken Cambodia from basically a failed-state, desperate

26

condition into a fairly rapidly growing least-developed country—to

move the country beyond the least-developed stage and become a

self-supporting place for the first time, really, since the 1950s or

1960s. That would be a big accomplishment.

The CHAIRMAN. Yes, Mr. Aldonas?

Mr. ALDONAS. Thank you, Senator Baucus. I just wanted to

chime in because your question invites something about the broader benefit of our openness and the ability of American companies

to source. We are living in a global economy where the nature of

competition has changed fundamentally to a global competition

over capital, talent, and ideas. Our goal, as you know, working on

tax policy, health care, and a variety of other things, is to make

ourselves as inviting a place for people to invest as possible by the

mix of those policies.

Well, trade policy plays a role in that. The more broadly open we

are, particularly to new sources of supply, we are benefitting people, including small businesses on the low end that have to be a

part of the global supply chain to be able to compete. So, in a weird

sort of way, in the world we are in now, this very openness is what

makes us most attractive.

The CHAIRMAN. How does the European Union preference program compare with the U.S., generally?

Dr. YAGER. We have a couple of different programs which are related to our preference programs. They have one program which is

called the ‘‘Everything but Arms’’ program which is available to the

least-developed countries, and while some of the products—some

agricultural products in particular—were phased in over a long period of time, it provides duty-free access to LDCs for virtually all

products shipped into the EU.

So you have some rules of origin, and some of those are fairly

restrictive and complex, as are the rules of origin in some of the

U.S. programs, but they have the ‘‘Everything but Arms’’ program

for the least-developed countries.

They also have other agreements that they have set up, the African, Caribbean, and Pacific (ACP) program, which is designed also

to help a particular group of countries. In those cases they have a

multi-step program which aligns not just the trade aspects, but

also the development aspects with other considerations. So they

have a package of programs, as does the United States, with different targets and different kinds of——

The CHAIRMAN. But generally about as generous, a little less

generous, more generous? If you could generalize.

Mr. ALDONAS. Well, I used to crack jokes about it, Senator Baucus, saying ‘‘Everything but Arms’’ was the Venus de Milo approach—it was only half a sculpture, and the program was half a

program. [Laughter.] The problem is, as Loren was pointing out,

the rules of origin are horribly complex. So, in a weird sort of way,

if you took the best of our stuff and limited it to the developing

world, and you took the best of their stuff and limited it to the developing world, you might have one good program.

But that is the sort of thing that you would want to think about,

and that is why I was suggesting harmonizing the rules with our

developed country trading partners so that they are consistent. It

27

would offer a much more powerful incentive for folks in the leastdeveloped countries, where they need the incentive most.

The CHAIRMAN. All right. We are going to have to conclude here.

Does anybody want to say anything, commenting on something

that somebody else might have said that was so outrageous it deserves a response? [Laughter.]

[No response.]

The CHAIRMAN. Seeing not, thank you very much. We deeply appreciate your time. It was very helpful.

The hearing is adjourned.

[Whereupon, at 11:28 a.m., the hearing was concluded.]

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