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UNITED STATES-AUSTRALIA AND

UNITED STATES-MOROCCO

FREE TRADE AGREEMENTS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 15, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

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(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

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

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 2

Lott, Hon. Trent, a U.S. Senator from Mississippi ............................................... 4

ADMINISTRATION WITNESSES

Allgeier, Hon. Peter F., Deputy U.S. Trade Representative, Washington, DC .. 5

Shiner, Hon. Josette Sheeran, Deputy U.S. Trade Representative, Washington, DC ............................................................................................................. 7

Johnson, Hon. Allen, Chief Agricultural Negotiator, Office of the U.S. Trade

Representative, Washington, DC ........................................................................ 9

PUBLIC WITNESSES

McGraw, Harold, III, chairman, president and CEO, The McGraw-Hill Companies, New York, NY, on behalf of the Business Roundtable ......................... 19

Kneen, Jon, chairman, Al-Jon, Incorporated, Ottumwa, IA, on behalf of the

National Association of Manufacturers .............................................................. 21

Cornwell, Lynn, rancher, Montana Stockgrowers, Glasgow, MT ........................ 23

Ruffner, Jeff, senior vice president and general manager, MSE Technology

Applications, Inc., Butte, MT .............................................................................. 24

Schulman, John, corporate executive vice president and general counsel, Warner Brothers Entertainment, Burbank, CA, on behalf of Time Warner and

the Entertainment Industry Coalition for Free Trade ...................................... 30

Mengebier, David G., senior vice president, governmental and public affairs,

CMS Energy Corporation, Jackson, MI, on behalf of the U.S.-Morocco FTA

Coalition ................................................................................................................ 32

Heck, Ron, producer, president of the American Soybean Association, Perry,

IA ........................................................................................................................... 34

Edwards, Lochiel, producer and president of the Montana Grain Growers

Association, Big Sandy, MT ................................................................................ 36

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Allgeier, Hon. Peter F.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 45

Responses to questions from Senators Bunning and Daschle ...................... 56

Baucus, Hon. Max:

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

Cornwell, Lynn:

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 62

Daschle, Hon. Tom:

Prepared statement w/attachments ................................................................ 64

Edwards, Lochiel:

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 70

Feingold, Hon. Russell D.:

Prepared statement .......................................................................................... 75

Page

IV

Grassley, Hon. Charles E.:

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

Prepared statement .......................................................................................... 77

Heck, Ron:

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 78

Johnson, Hon. Allen:

Testimony .......................................................................................................... 9

Responses to questions from Senators Bunning and Daschle ...................... 56

Kneen, Jon:

Testimony .......................................................................................................... 21

Prepared statement .......................................................................................... 81

Lott, Hon. Trent:

Opening statement ........................................................................................... 4

McGraw III, Harold:

Testimony .......................................................................................................... 19

Prepared statement w/attachment .................................................................. 84

Mengebier, David G.:

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 125

Ruffner, Jeff:

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 129

Schulman, John:

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 131

Shiner, Hon. Josette Sheeran:

Testimony .......................................................................................................... 7

Prepared statement w/attachment .................................................................. 135

Responses to questions from Senators Bunning and Daschle ...................... 56

Smith, Hon. Gordon:

Prepared statement .......................................................................................... 147

COMMUNICATIONS

Automotive Trade Policy Council ........................................................................... 149

Dakota Resource Council ........................................................................................ 152

Distilled Spirits Council of the United States ....................................................... 155

Erie Foods International, Inc. ................................................................................. 162

National Corn Growers Association (NCGA) ......................................................... 164

National Farmers Union (NFU) ............................................................................. 167

U.S. Chamber of Commerce .................................................................................... 172

Western Organization of Resource Councils (WORC) .......................................... 176

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UNITED STATES-AUSTRALIA AND

UNITED STATES-MOROCCO

FREE TRADE AGREEMENTS

TUESDAY, JUNE 15, 2004

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:39 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Lott, Snowe, and Baucus.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Good morning, everybody.

As you know, our meeting did not start on time. Originally it was

10:00, and we changed it to 10:30 because the president of Afghanistan, Mr. Karsai, spoke to a joint session of Congress. So, all of you

who had to change your schedules, we thank you for doing that.

Today, as you know, we are gathered here to hear testimony on

the U.S.-Australia and the U.S.-Morocco Free Trade Agreements.

Today, the committee will briefly meet in executive session to

consider Senate Joint Resolution 39, which are to approve the renewal of sanctions for Burma. If we do not get a quorum to do that,

I think Senator Baucus and I have agreed that we will vote off the

floor today in the Senate.

So I would, first, want to thank our panelists, many of whom

traveled a long way to be here to testify about the importance of

these agreements to their industries, and I especially want to

thank John Kneen and Ron Heck, both of whom traveled here from

Iowa. I know Senator Baucus has constituents here as well.

I am confident that their testimony, along with the testimony of

all witnesses, will show that both the Morocco and the Australia

free trade agreements are solid agreements which deserve broad bipartisan support of the Congress.

Each of these agreements was negotiated using the trade promotion authority procedures established by Congress in the Trade

Act of 2002. These procedures require intensive consultation with

Congress throughout the negotiation process.

While I may not agree with the substantive outcomes of these

consultations in every respect, I am confident that both agreements

will receive bipartisan support.

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I am especially pleased with the strong and comprehensive agricultural provisions in the U.S.-Morocco free trade agreement.

To ensure the future support of me and many in the agricultural

sector, I would strongly encourage the administration to negotiate

comprehensive agreements like the Morocco Free Trade Agreement

which do not exclude specific commodities from negotiations.

The Moroccan agreement provisions significant improved market

access for Iowa-produced soybean, corn, and beef in the fast-growing Moroccan market. In addition, the U.S.-Morocco Free Trade

Agreement contributes to the President’s goal of establish a U.S.-

Middle East Free Trade Agreement by the year 2013.

As many Middle Eastern countries are major importers of food

and agricultural products, such a free trade agreement would

greatly benefit both farmers in the United States and consumers

in the Middle East.

I would also like to add that I am pleased that the Australians

recently completed negotiations involving the reviewing of the sanitary restrictions regarding U.S. pork, and, due to the science-based

decision, Australia will now permit the importation of U.S. processed pork and U.S. pork for processing.

I am hopeful that the U.S.-Australia Committee on Sanitary and

Phytosanitary Matters and the Standard Technical Working Group

on Animal and Plant Health Measures which are established under

this free trade agreement will be able to work successfully to address contested sanitary and phytosanitary barriers that remain

between the two countries.

In addition, the recently enacted state-of-the-art Moroccan labor

law is an example of the progress that can be made in areas beyond trade as we engage in bilateral free trade negotiations.

Both the Moroccan and Australian free trade agreements will

provide important new economic opportunities to America’s manufacturing service and agricultural sectors.

Both of these agreements will also help solidify our international

alliances with two valuable allies in the war on terrorism. Through

trade, our Nations will be drawn even closer together and the

friendship among our people very much strengthened.

I now call upon our friend Senator Baucus to speak before we go

to testimony.

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

FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. First, I thank you

for holding today’s hearing.

Thank you, also, to our witnesses, Ambassadors Allgeier, Shiner

and Johnson, who have worked very hard and worked very closely

with members of Congress. I thank you for your service to our

country. You have done a very good job.

And to Montanans who are here, I want to thank them. Lynn

Cornwell is here. He has been a staunch member of the Montana

agricultural community and national agricultural community, particularly on the cattle side, for years; Lochiel Edwards, representing grain producers; and also Jeff Ruffner, a business man

in Montana who is looking for export opportunities, especially in

3

Australia. I thank you for coming and spending some time with us

and giving us your insights.

Congress will soon consider implementing legislation for the Australia and Morocco Free Trade Agreements. But the Australia

agreement, I must say, created considerable anxiety in Montana’s

farming and ranching industries, and I want to focus a little bit on

that agreement today.

When Ambassador Zoellick first raised this with me as the idea

of an Australian trade agreement, I was concerned. On the one

hand, Australia is a valuable ally, including in the WTO. Australia

is an important export market for U.S. products and a platform for

exports into Asia. It has high labor and environment standards.

But Australia is also a major exporter of agricultural goods,

many of the same goods that we produce in Montana. So I face a

tough choice. I could oppose this agreement and play a little role

in shaping it, or I could engage negotiators and work to improve

the agreement to make it reflect the needs and interests of Montana and the country.

After consulting with Montanans, especially in the agricultural

sector, I chose to work to improve the agreement. From the beginning, I worked closely with our negotiators. I also met with the

Australian prime minister and other officials to make sure they understood our concerns.

Last December, as the negotiations entered a crucial phase, I

gave Ambassador Zoellick a list of my priorities on behalf of Montana farmers and ranchers and offered a few ideas on how to proceed.

My staff and I worked closely with the administration in the

final months of the negotiations, and in the end we achieved an

agreement that addresses most of my concerns.

For beef, this agreement offers a long transition period of 18

years and includes two strong safeguards to preserve the integrity

of U.S. beef markets.

For dairy, it also includes a long, 18-year transition period and

leaves over-quota tariffs unchanged. For sugar, the agreement

gives no additional access, and for wheat the agreement provides

that Australia will work with the United States in our efforts to

reform export state trading enterprises as part of the Doha Round.

Beyond agriculture, the agreement offers the United States and

Montana manufacturers an opportunity to expand their share of

the Australian market. Already, Montanan companies export more

than $3 million worth of products to Australia, a figure that will

only grow with this agreement.

In fact, with this agreement the United States’ manufacturers

are expected to export $2 billion more every year. Moreover, the

agreement provides new opportunities for the United States’ service industries, which are fast becoming the cornerstone of America’s export economy.

For these reasons, I have decided to support the Australia trade

agreement and I commend Ambassador Zoellick, along with Ambassadors Shiner an Johnson, for your solid work on this agreement.

On the Morocco agreement, I worked hard to ensure that American producers would have the very same access to Morocco that

4

the Europeans have, especially for wheat. I made clear to both the

U.S. Trade Representative and Moroccan officials that I would

strongly oppose an agreement that did not open Morocco’s market

to United States wheat exports. I am glad that we were able to negotiate strong access.

Let me end with two issues that I think we should think about

as we move forward. First, we must focus our trade agenda on jobs.

American agriculture and American workers need to see a trade

agenda that benefits their bottom line. I urge the administration

to put more resources into negotiating economically meaningful

agreements and I urge it to redouble its efforts on enforcement.

Second, we need to do better on labor and environment standards. Too often, U.S. negotiators simply negotiate against themselves. Other countries will accept strong provisions, but we tell

them that they do not have to, or we let them think they do not

have to.

But they will accept higher standards, in my judgment, if we, at

the outset, ask for higher standards. We should not be negotiating

against ourselves. If we want to pass trade agreements with broad

Congressional support, this area requires improvement.

Now, I expect the Congress will pass both the Australia and Morocco agreements with significant margins, but looking ahead I see

some problems. The U.S.-Central American agreement will not

pass Congress without further efforts on labor and environment

provisions. I will work hard to improve that agreement, but we

have a lot of work to do.

I look forward to the testimony, as I indicated earlier, from all

of you, and thank you for your very hard work.

Mr. Chairman, thank you again for holding this hearing. I think

we are making some progress here.

The CHAIRMAN. Thank you, Senator Baucus. I appreciate your remarks.

Senator Trent Lott asked if he could speak just for a few minutes.

Senator BAUCUS. Well, I do not know about that.

The CHAIRMAN. All right. Without objection, go ahead.

OPENING STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR

FROM MISSISSIPPI

Senator LOTT. Thank you, Mr. Chairman and Ranking Member.

Thank you for having this hearing. As we all know, we do not have

a whole lot of time left in this session. I think it is very important

that we move both of these agreements.

I have had occasion to discuss these agreements with agricultural interests, manufacturing interests, with the Prime Minister

Howard of Australia, who has talked a lot about it in every trip he

has made to Washington in the last 2 years, and King Abdullah.

I think these agreements will benefit American interests and will

benefit these two countries that have proven to be very strong allies. I just wanted to be here to go on record in support of both of

these agreements.

I thank you, Mr. Chairman, for having the hearing, and I urge

that the committee act as expeditiously as possible so that we can

5

squeeze these agreements through the process before we end the

session the first of October. Thank you.

The CHAIRMAN. Thank you, Senator Lott.

Our first three witnesses are no stranger to this committee or to

a lot of people in Washington, DC. We have Peter F. Allgeier, Deputy U.S. Trade Representative. We have Hon. Josette Shiner, Deputy U.S. Trade Representative, and we have Allen Johnson, Chief

Agricultural Negotiator, and he is also in the Office of the U.S.

Trade Representative.

I think we will do it in the direction I have introduced you, so

would you go ahead, Mr. Allgeier?

STATEMENT OF HON. PETER F. ALLGEIER, DEPUTY U.S.

TRADE REPRESENTATIVE, WASHINGTON, DC

Mr. ALLGEIER. Thank you very much, Senator. I would like to

thank you, Senator Baucus, Senator Lott, and the other members

of the committee who have worked so closely with us as we move

forward with our free trade agreements.

Ambassador Zoellick and Minister Fassi Fihri will be signing the

Moroccan agreement this afternoon. I appreciate the opportunity

today to discuss this agreement with you and to receive your comments.

Before talking about the specifics of the agreement, I would like

to make one broader point about the agreement. That is that the

administration’s trade agenda is a fundamental part of the President’s broader efforts to advance reform in North Africa and the

Middle East.

In May a year ago, the President announced the initiative for a

U.S.-Middle East Free Trade Agreement by the year 2013. Our

trade strategy is predicated on the idea that sustained economic

growth can best be brought to this region through internally generated reforms with market-based trade liberalizing policy, so that

is the broader environment for this agreement.

Working in close partnership with Congress has been critical to

our success to date. The Trade Act of 2002 provided the procedures

and the basis on which we are able to complete negotiations that

address the pressing need for greater U.S. engagement in this region that provide benefits for U.S. economic interests, but also that

bolster the economic and social reforms in our partner countries.

Certainly this is the case with Morocco, where Morocco has signaled, by completing this agreement with us, its serious intention

to pursue and to lock into place profound economic reform.

Now, as far as the benefits for the United States, we are confident that this agreement will bring significant benefits for U.S.

exporters, workers, investors, farmers, and ranchers.

I would like to identify two dimensions in which this agreement

is going to level the playing field for our U.S. interests.

First of all, vis-a-vis Morocco itself, right now the average tariff

that we face on consumer and industrial goods in Morocco is 20

percent, whereas they face tariffs in the United States of 4 percent.

Under this agreement, more than 95 percent of the two-way

trade in industrial and consumer products will go to zero on the

day that the agreement enters into force.

6

The second dimension of leveling the playing field has to do with

our competition vis-a-vis the Europeans. As you know, the Europeans have had preferential access to Morocco. We will now level

that playing field and the competitiveness that we have in that

market.

Al Johnson will talk about the agricultural negotiations and the

benefits that we received there. Let me simply say that we have

been able to craft an agreement that balances Morocco’s development needs with our own economic interests.

In the case of services, we have achieved significant market access improvements there, particularly in the areas of banking, insurance, audio visual, telecommunications, and computer-related

services.

The agreement also provides for a high level of intellectual property protection. It includes state-of-the-art protections for trademarks, for digital copyrights, and also expanded protection for patents and for product approvals for marketing of pharmaceuticals.

Government procurement and the Customs chapters provide for

transparency and greater efficiency, and therefore improved market access for us as well.

The agreement includes rules of origin provisions that will enable us to count the value of inputs from other free trade area partners in the region. This is important in achieving our goal of an

integrated region under the Middle East free trade area, and it also

promotes greater trade among the countries which is a missing, but

very important, ingredient in their development.

You all have mentioned the labor and environment provisions.

We have included in this agreement those provisions that meet the

objectives set forth by Congress in the Trade Promotion Act.

They are a part of the text of the agreement itself. Parties commit to enforce their own laws, and this, of course, is enforceable

through the dispute settlement procedures in the agreement.

The other thing I think that Senator Grassley referred to, is that

these types of negotiations provide us with the opportunity to promote improved practices in these countries.

In the case of Morocco, we have seen a new labor law passed

which just entered into force a week ago, which has some very important provisions for protection of workers, and particularly raising the minimum age for workers. Morocco also passed a new

framework environmental law and air pollution law.

Further important elements in the agreement are its transparency, its public notification, and its anti-bribery provisions.

The agreement also establishes investment provisions that improve the protections for United States investors. We have an existing bilateral investment treaty with Morocco, but we think that the

provisions in the free trade agreement provide improved protections for our investments.

So, in conclusion, the U.S.-Morocco Free Trade Agreement is a

comprehensive, well-structured agreement that will provide concrete benefits for U.S. interests, but also for Moroccan interests,

and will promote the broader interests that we have in economic

reform in that region.

With your guidance and support, we will continue to pursue the

Middle East free trade area initiative, and working together we feel

7

confident that we can build a trading and investment community

within the Middle East and North Africa that will stimulate economic growth, generate prosperity, promote democracy, and be in

the economic interests of the United States.

Thank you. I will be happy to respond to any questions or comments that you have.

The CHAIRMAN. We will have questions at the end of the panel.

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

The CHAIRMAN. Ms. Shiner?

STATEMENT OF HON. JOSETTE SHEERAN SHINER, DEPUTY

U.S. TRADE REPRESENTATIVE, WASHINGTON, DC

Ms. SHINER. Mr. Chairman, Senator Baucus, Senator Lott, I welcome this opportunity to feature the significant accomplishments of

the U.S.-Australia FTA and to hear the committee’s views on the

implementation of this agreement and the legislation required.

I especially appreciate your leadership, Mr. Chairman, and I am

grateful to you and to Senator Baucus, members of this committee,

and your staffs for the guidance and advice you have provide Ambassador Zoellick, me, Ambassador Johnson, Chief Negotiator

Ralph Ives, and the rest of our USTR and interagency team during

this negotiation.

You are forceful advocates for America’s farmers and workers

and for the farmers and workers in your States. Our close cooperation helps ensure that we close strong win-win agreements.

This is an historic trade agreement, as you pointed out, Mr.

Chairman, with one of the United States’ closest friends and allies.

The United States and Australia have long had a special partnership. Our Nations’ sons and daughters stood side by side against

tyranny throughout the last century, and they do so again today

in Afghanistan and in Iraq.

This is only the third FTA ever negotiated between two developed countries. The first, between Australia and New Zealand, and

the second 16 years ago between the United States and Canada. It

will eliminate virtually all duties, including more than 99 percent

of the tariff lines covering U.S.-manufactured goods and exports to

Australia on day one.

This is the most significant immediate reduction in industrial

tariffs ever achieved in a free trade agreement. It will immediately

make our manufacturers, from household goods, to chemicals, to

machine tools, better able to compete in Australia against European, Japanese, Korean, and Chinese traders.

The International Trade Commission estimates that the tariff

cuts alone will increase U.S. exports to Australia by about $1.5 billion annually. In fact, the United States enjoys a hefty trade surplus with Australia. We currently export about twice as much to

Australia as we import from Australia. Our trade surplus on industrial goods alone topped over $6 billion in 2003.

American businesses, farmers, and workers see exciting new opportunities from this agreement. When I travel the world, I see

Caterpillar tractors and road graders dotting the world’s landscapes. In Australia, this is this icon’s second-largest export market

already.

8

But with the immediate elimination of duties from the FTA, Caterpillar expects its annual sales to Australia to increase to $1 billion annually over the next decade.

It is not just large companies that expect to benefit. In Iowa, a

company named Vermeer Manufacturing, which manufactures

equipment in Pella, Iowa, and employs 1,700 workers, as you know,

Mr. Chairman, sells $7 to $10 million in Australia yearly, including

this horizontal direction drill, which I think works that way. They

say they expect, with the elimination of the 5 percent duty on this

product, that they will increase sales between $500,000 and

$700,000 a year.

In addition to the benefit to the manufacturing sector, duties on

all U.S. farm exports to Australia, which Ambassador Johnson will

speak of more, literally from soup to nuts, nearly $700 million in

2003, will be eliminated on the first day the agreement goes into

force.

And, as you pointed out, we have made progress on food inspection procedures that have posed barriers in the past to keep out

products such as pork, and Ambassador Johnson will address

those.

Just to briefly note some of the other highlights of the agreement, in the services area, Australia will provide substantial new

market access in the telecommunications, computer services, tourism, energy, construction, education, and other services sectors.

The agreement ensures improved market access for the U.S. entertainment industry, including films and television, and provides

new rights for life insurance and express delivery providers.

Australia and the United States invest deeply in each others’

economies, and the agreement fosters this partnership by exempting most U.S. investments from screening by the Australia government. This FTA is the first to include non-tariff market access provisions to address issues in the pharmaceutical sector.

This is an agreement for the digital era, with innovative electronic commerce provisions and state-of-the-art intellectual property protections for U.S. trademarks, copyrighted works, including

digital works and patented products. It strengthens penalties for

piracy and counterfeiting, providing strong deterrents against these

illegal activities.

In the area of government procurement, U.S. suppliers will be a

step ahead of most other nations by obtaining through this FTA

non-discriminatory rights to bid on contracts from 80 Australia central government entities.

In this agreement, once again, the United States has been able

to include the world’s highest standards of enforceable labor and

environment provisions in any trade agreements anywhere.

We are the leaders on the nexus between trade and workers’

rights and care for the environment, and this agreement is no exception. This is an achievement forged in close partnership with

Congress and this committee, and we are grateful for the leadership in these areas.

Finally, on enforcement—Senator Baucus, you raised this issue

in particular—I believe our FTAs are our single most effective tool

in setting the world’s highest standards for a level playing field in

trade.

9

Our FTAs typically contain hundreds of pages of enforceable obligations that are the bedrock of building a fair, level, and enforceable playing field for trade between nations.

The U.S.-Australia FTA is no exception to this tradition of excellence. The nearly 1,500 pages of rules and commitments that comprise this FTA will form the basis of our enforcement program.

In closing, let me just point out that in addition to the specific

benefits of this agreement, there are other benefits as well. Australia has been one of our closest and most reliable partners in pursuing trade liberalization around the world.

Both our countries are strongly committed to advancing the Doha

development agenda, and our alliance in the WTO has been further

fortified through the FTA negotiations.

We are sure that this alliance will improve, on the FTA, the

prospects for a successful outcome in these global negotiations

which are the highest priority for both nations’ trade agendas.

The FTA will also help us advance our goals in the Asia Pacific

region and will allow our companies to be more competitive in that

region. I thank you for your attention and also for your help in

moving these agreements forward, and look forward to answering

any questions you may have.

Thank you.

The CHAIRMAN. We just learned that we have a vote at 12:15, so

I am going to ask this panel and the succeeding panels to try to

stay within the 5 minutes. I do not mean to demean. It was my

fault that it went on. But I did not realize we had that vote this

soon.

[The prepared statement of Ms. Shiner appears in the appendix.]

The CHAIRMAN. Mr. Johnson?

STATEMENT OF HON. ALLEN JOHNSON, CHIEF AGRICULTURAL NEGOTIATOR, OFFICE OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, DC

Mr. JOHNSON. Well, first of all, thank you, Mr. Chairman and

Senator Baucus. I appreciate the opportunity to be here. I think it

is fair to say that in both of these agreements one of the most critical issues for us to address was a successful conclusion to the agricultural provisions. The challenge with any agreement is trying to

balance our offensive interests and opportunities with some of our

more import-sensitive issues.

By meeting with you and members of your staff and the agricultural community over the last several months, I think we were able

to strike that balance on these important issues. I think both of

them are good agreements for U.S. agriculture in both creating equitable and fair treatment, as well as new opportunities.

Briefly, let me just go through a couple of the things that I know

would be of interest. First of all, I would like to point out the

broader fact, which is that, of course, creating good opportunities

for other sectors outside of agriculture is important to agriculture.

A strong economy at home is important for maintaining and

growing our domestic markets for agricultural products, and I can

say that the Australian Free Trade Agreement clearly does that, as

Ambassador Shiner just said.

10

It also creates new opportunities for our exports. Duties on all farm exports, which are about $700 million in 2003, are going to

be eliminated on the first day. A little known but interesting fact

is that, on a per capita basis, Australia spends about $4.50 per person on our products, compared to each dollar that we spend on

Australia products.

The United States is already the second-largest supplier of agri- cultural products to Australia’s $56 billion food market, and our position is going to continue being strengthened with the preferred

treatment we get under this agreement.

Again, currently Australia maintains a tariff between 5 and 30

percent, and these will be going to zero on the first day. The beneficiaries of that are oilseed products, notably soybeans, processed

foods, fresh fruits and processed fruits, vegetables and nuts, olives,

dried onions, and the list goes on.

Of course, one of the things that was extremely important to our

agricultural community and our members of Congress was addressing SPS concerns. We worked very closely on these issues since

2001 in trying to address a broad range of issues, which included

not just specific products, but also process, ensuring that we have

a process in place for working through these issues. And, as you

mentioned, Senator Grassley, we have established bilateral committees and working groups for continuing this work.

One success story has been table grapes. We accessed that market for the first time in 2002 by addressing the SPS concerns. That

is now a market of about $3.2 million for our grape producers.

Processed pork products and pork processing is another success.

Again, we resolved many of the SPS issues that are going to result

in an estimated market of $30 to $60 million.

Other issues obviously still need work, and we are going to continue to work on them, whether it is poultry, citrus, stone fruit, or

apples, but many are done that get less note, which include a few

issues related to beef and sweet corn seed.

Another issue with important sensitivities, as it relates to Australia, was beef. As I told some Montana ranchers last week when

I was there, your help, Senator Baucus, in engaging on these issues

was extremely important in ensuring that we were able to deal

with these issues sensitively, while at the same time creating,

again, opportunities not just in Australia, but more broadly for our

beef producers. We can talk more about that in the question and

answers if you want the details.

When it comes to dairy, again, the top priority of our dairymen

was maintaining the out-of-quota tariff, which we did in this agreement, and expanding and keeping the TRQs at a manageable level.

In the first year, the TRQ is 0.2 percent of the annual value of

U.S. dairy production and that will allow us to maintain our dairy

programs. The growth factors for these TRQs will be reflective of

the sensitive items that were in the program, or products that we

tended to produce less in the United States. Then, of course, as it

relates to sugar, the WTO access was maintained, but no additional

access was given.

Finally, on Australia, I will just note that we have a very close

working relationship with Australia in the WTO. I was just with

Australia in Brazil over the weekend, and will be with them again

11

next week in Geneva. I was with them the week before last in Geneva.

They are working very hard with us and trying to create a successful round because we share a lot of the same objectives in

eliminating export subsidies, substantially reducing domestic support and increasing market access around the world.

Finally, on Morocco, there are over 30 million people in Morocco,

and some 50 percent of those people live in rural areas. About 70

percent of the land area is in agriculture. It is a growing economy

with this FTA, but we targeted trying to create a stable environment for their economy for reform and increasing our agricultural

exports.

When it comes to beef and poultry for the first time, we are going

to have access to markets that had not existed previously. When

it comes to durum and common wheat, we have caught up to the

Europeans and the Canadians, and in some ways passed them, potentially increasing our wheat exports by about five times.

Senator Grassley, as you know, you were very helpful in getting

Morocco’s markets opened in very short order for U.S. farmers, as

it related to sorghum, corn, soybeans and products, and inclusion

of a preference clause that ensures that for all these products that

I just mentioned we will always be treated as good, or better, than

anyone else in the Morocco market.

Again, let me just close by saying that these agreements are solid

in their own right. They achieve the objectives defined by Congress

and TPA. More importantly, they create new opportunities for U.S.

farmers and ranchers. While sensibly dealing with their sensitivities, it does add to the message that the United States is moving

forward on agricultural trade.

This creates new and strengthened partners in our global agenda. With about 96 percent of our potential customers outside our

borders, it is extremely important that we take advantage of this

opportunity to send this message and build these partnerships as

we move into the future. Thank you.

The CHAIRMAN. Thank you.

We will take five minute rounds of questions.

I am going to start with you, Ambassador Allgeier. Mr. McGraw,

who is on the next panel, is going to be testifying along these lines,

and I would like to ask you to react.

He states that having just returned from trips in Europe and

China, he has seen firsthand how governments and business leaders are looking to our country for leadership in moving the trade

agenda along.

First, do you agree with his statement? Second, what is your perspective on how Australia and Morocco FTAs fit into this administration’s broader effort to move the trade agenda forward?

Mr. ALLGEIER. First of all, I agree completely with his observation that throughout the world, governments and businesses look

to the United States to provide leadership.

I think this is most clear in the multilateral negotiations in the

WTO, where the United States is seen as, and relied upon as, the

primary energizer and creative thinker for that negotiation.

In terms of how Morocco and Australia contribution to our broader trade agenda and to this leadership, I would cite three things.

12

First of all, these negotiations give other countries, especially in

these regions of North Africa, the Middle East, and Southeast Asia

or Asia Pacific, an incentive to negotiate with us. Nobody wants to

be left behind in terms of access to the largest market in the world.

Second, these sorts of high-quality, comprehensive FTAs set the

standard, both in multilateral negotiations and in further free

trade agreements. Third, these agreements demonstrate to the

world that Congress and the administration can work together to

bring into force high-quality trade liberalizing agreements. This

gives us credibility as negotiators and it undercuts those who criticize the United States as being protectionist.

The CHAIRMAN. All right.

Ambassador Shiner, it is my understanding that Australia is one

of the few developed countries that is not a party to the World

Trade Organization government procurement agreements.

Could you elaborate then on the benefits of the government procurement chapter that is in the Australia free trade agreement,

considering the fact that they do not participate in the WTO aspect

of it?

Ms. SHINER. Mr. Chairman, organizations as diverse as the National Association of Manufacturers and many of our high-tech

firms like EDS have lauded this particular provision in the agreement because, prior to this FTA being negotiated, we did not have

access to bid on government procurement contracts in Australia.

They are not a party to the WTO plurilateral agreement, which

means their bidding is not open, and has not been open to the

United States. We, under this agreement, will be able to bid for

those contracts. We will not be subject to local content rules.

It is something that, in particular, our small and medium manufacturers feel will be an excellent opportunity for them, and our

data processing high-tech groups, and others. So, we feel this is a

significant benefit here and one that will be immediately open opportunity for our workers.

The CHAIRMAN. Yes.

Ambassador Johnson, it is my understanding that South American countries are major competitors to the United States for Morocco’s corn and soybean market. Would you know the share of the

Moroccan market currently held by U.S. corn producers and soybean producers in comparison to their South American counterparts, and do you have any projection as to how the U.S. market

share for these products might change following implementation of

the U.S.-Morocco agreement?

Mr. JOHNSON. Well, Senator, just to give you some idea, in 2003,

as related to corn, Argentina exported about $56.5 million worth of

product to Morocco, and Brazil about $14.8 million. We exported

about $34.6 million. As it relates to soybeans, Brazil sent about

$33.8 million, we sent about $54.6 million.

So, our share has been strong, but obviously in some years—and

particularly, as I just mentioned in corn—their actual percentage

of the market is higher than ours.

We would anticipate, obviously, that when you address a 40 percent duty on corn and a 22.5 percent duty on soybeans, and that

we will have duty-free access within a very short period.

13

Basically the way the agreement is, we will get a 50 percent

down payment on the first year, and then it phases out over the

next five, and our percentage of that market will be increasing and

strengthened significantly.

The CHAIRMAN. As you know, U.S. agricultural producers remain

concerned about the number of sanitary and phytosanitary measures imposed by Australia that they contend are not based on

science.

How confident are you that the Committee on SPS Measures and

the Standing Technical Working Group on Animal and Plant

Health Matters, both of which are established under this free trade

agreement, will be able to resolve differences between the United

States and Australia regarding these sanitary and phytosanitary

measures?

Mr. JOHNSON. I feel confident that we are going to have very constructive engagement, as we have had in the past. As I mentioned

earlier, for the first time we got access to grapes because we were

able to work through some SPS issues. We are about to get some

significant access as it relates to pork because we have been working through some SPS issues.

I think there is a pattern of behavior and confidence building

that we have done between us and our Australian counterparts

that, fortunately, I think is yielding results for U.S. agriculture and

the other products on the list.

We have a clear plan for how we are going to address them and

work through them, so I have every confidence that we will be able

to deal with these things on a science basis and resolve them.

And I should just point out more generally that Australia also

has moved not just with the United States, but has moved on

issues related to bananas with Thailand, apples with New Zealand.

We are seeing Australia interacting in these SPS issues on a broad

basis and trying to address the concerns that we and other countries have raised.

The CHAIRMAN. My time is up. I have one more question for Mr.

Johnson, and I will submit it for answer in writing.

[The question appears in the appendix.]

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. Thank you. Thank you, Mr. Chairman.

I would just like to nail down that the safeguard provisions on

this Australian agreement are automatic, that is, they are not discretionary.

Ambassador Johnson, since it is agricultural, could you maybe

expand on that? There is just some uncertainty as the degree to

which they are automatic, that is, if 110 percent is reached and the

price safeguard trigger is reached. Or is it discretionary? My understanding is that it is automatic. If you could confirm that, I would

appreciate it.

Mr. JOHNSON. Yes, it is automatic. There are two safeguards, a

volume phase safeguard during the transition and a price-based

safeguard after the transition that continues indefinitely, and both

of them are automatic.

Senator BAUCUS. All right.

Could you shed some light, too, on the negotiations with regard

to the state trading enterprises? I know that Australia would not

14

agree to reform, but yet Australia would agree to work with us, I

guess, in the next round, this round, the Doha Round. Are they

pushing that off or is that real? What is going on here?

Mr. JOHNSON. No, I think it is real. Obviously, as you enter these

negotiations we have our objectives and they have theirs. We push

very hard, and you pushed us very hard related to export state

trading enterprises, like the Australian wheat board.

It is important to understand what we got with the Australia

agreement and how it fits in the global negotiations. Obviously,

Australia had on their list of things, what they wanted were our

subsidy programs, credits, and other things. Both of us realized

that we needed to address these issues in the broad context of the

WTO.

One of the challenges that we had in the WTO, frankly, was that

consistently we would find Australia, Canada, and a few others

pushing hard on maintaining the export state trading monopolies.

We feel strongly, as part of a comprehensive agreement, those

should be addressed.

Australia agrees, as part of this agreement, that they should be

addressed. That then has allowed us in the WTO, even in the last

few weeks, to be making progress on addressing these concerns in

the WTO, and, frankly, it puts Canada in a position where they are

one of the few advocates for maintaining these monopoly powers

after export subsidies and other issues have been addressed.

So, I think it has been very helpful to us in the WTO context,

and Australia is certainly living up to their part of the bargain of

constructively engaging.

Senator BAUCUS. I know you know this, but just continue to

press because it is a big issue for a lot of people in our country,

that is, in grain States, to address this. It is just not fair. Maybe

we have to deal with some of their concerns about our system at

the same time, but, nevertheless, I think we should deal with

those.

Next, this is not Australia, but it is beef. How are we going to

get more beef sold? Can you give us a status report, to the degree

you know, on Japan or Korea, for example, with BSE? What is

going on?

Mr. JOHNSON. Well, it does relate to Australia in the sense that

Australia is working with us in trying to get international standards.

Senator BAUCUS. That is to their interests, too.

Mr. JOHNSON. Exactly. So it is worth noting that in our agreement the TRQ expansion does not begin until the third year, or our

exports recover from this BSE incident back to our 2003 levels. So,

Australia is sensitive to that. They are working with us in the

international environment in trying to address these concerns on a

science basis.

When it comes to Japan and Korea, obviously USDA is working

through this on the regulatory side. But I think there have been

a couple of good meetings with the Japanese. There is another

meeting scheduled in a couple of weeks. The Koreans have been

here recently.

I think people are feeling good that we are providing them the

information that they need in order to justify, based on science,

15

opening these markets. From our side, we certainly have stressed

this in our meetings with the Koreans and the Japanese from a

trade perspective, that we see it important that they base their decision on science and open those markets.

Senator BAUCUS. Because Japan imported 10 percent of our exports at one time.

Mr. JOHNSON. Yes. I think, obviously, Japan is an extremely important market. Korea is right after, and Mexico is right after that.

In Mexico, we have gotten back to the point, about 91 percent, of

our pre-BSE problems. So, we are making progress. I would expect

progress in the coming weeks on both of those markets.

Senator BAUCUS. If I could ask a general question here. Really,

it gets to, what opportunities do you see and how can free trade

agreements and negotiations help, that is commercially, but also

our standing in the world? I am addressing some of the tension

that is existing today between other countries, namely our allies,

and in some countries in the Mid-East and the United States.

There is some improvement, clearly, with the U.N. resolution. G–

8 seemed to make some progress, but I am assuming that trade

agreements are also a way to kind of help with communications

and to get some agreements, and so on, and so forth.

All of these things are somewhat tied together, but if any of you

could just expand a little bit on the opportunities that trade has

to help us deal with this matter that we Americans seem to be facing worldwide.

Mr. ALLGEIER. Well, I think that the principal contribution that

the trade agreements make is to give people a sense of hope in

their economic future, and certainly that is what we have seen, for

example, in the Middle East in the case of Jordan. We expect that

to be the case with Morocco and with other agreements.

Senator BAUCUS. Australia, Jordan and Morocco are all friends.

But I am just curious as to how else we can use it, if you will, almost as a foreign policy tool in addition to a trade tool.

Ms. SHINER. Senator, if I could say, briefly, it is very interesting.

As we lead up to discussions with countries about free trade agreements, we end up in a very complex and deep dialogue with them

about our systems and the differences and how they mesh, and in

many ways it drives reforms and creates the kind of atmosphere

that our businesses are used to, the rule of law, courts, transparency, and expeditious Customs processes.

So, I think this fabric that you see being built between us and

our FTA partners, because the standards are much higher than we

are able to achieve in the WTO, is quite profound.

I am headed out to Vietnam this summer. It is interesting, as

countries want to be on the list, want to be considered by the

United States, they look at where they need to improve their systems, and it is really creating, from my point of view, the highest

standards in government transparency, in openness, and enforceable trade rules.

So, I think beyond the WTO, these FTAs allow us to move the

bar forward and allow us to plow some new ground, as we have in

labor and environment with your help.

Senator BAUCUS. Do you have any FTA negotiations with

France?

16

Ms. SHINER. If they would be open to discussing agriculture. We

would never do it without taking care of our farmers.

Senator BAUCUS. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Now, the Senator from Maine, please.

Senator SNOWE. Thank you, Mr. Chairman.

Ambassador Shiner and Ambassador Johnson, with respect to

the provisions regarding dairy, as you know, a number of members

of Congress wrote a letter concerning the original dairy provisions,

and I understand there has been a compromise as a result of maintaining the tariff.

I would like to hear your response to this entire issue to ensure

that we have, in fact, maintained fairness in this agreement with

respect to our dairy farmers in this country.

I have 395 dairy farmers that employ more than 2,000 workers

in my State, and I know there are a number of issues regarding

the diary industry and they are not entirely supportive of the provisions in this agreement.

So, can you address these issues and how you can assure us that

U.S. producers got a good deal in the final analysis?

Mr. JOHNSON. First of all, I want to compliment the industry, because I know the industry had certain frustrations throughout this

process, and yet they stayed very engaged with us throughout the

process, and making it clear to us what their priorities were.

We tried to work with them very closely right up, I can assure

you, until 11:59, so to speak, which is really 3:00 or 4:00 in the

morning, in terms of trying to deal with their concerns.

One, they told us that their top priority was maintaining the outof-quota tariff, which we maintain in this agreement; and two, that

they wanted to make sure that the quota quantities were such that

they are manageable and not a threat to the program.

The TRQs that we agreed to in this agreement basically equal

about 0.2 percent of the annual value of U.S. dairy production. On

a tonnage basis, for example, it is about 0.03 percent of the milk

production in 2003. Then in addition to that, we were sensitive to

the dairy programs, obviously, because that is an important part

of our farm policy.

So, our analysis shows that it allows for the support of our programs. In other words, it does not undermine them. The growth

factors that we use for the products that were in the programs

were much lower than they were for other products, particularly

products that we tended to not produce as much of in this country.

So I think, overall, it is a fair agreement. I understand the dairy

industry’s concerns. We continue to talk to them not just on Australia, but all the other negotiations, and have worked very closely

with them in trying to address the priorities.

Senator SNOWE. Well, on their concerns, exactly how would you

address them currently? I mean, how would you mitigate their concerns? Do they have legitimate concerns with this current agreement? To maintain the quota, I understand that.

Mr. JOHNSON. Right.

Senator SNOWE. I think the real issue is who, now, will be affected, and why.

17

Mr. JOHNSON. Well, in terms of the maintaining of the program,

the short answer is, basically what sets the price or ensures the

price stability is our out-of-quota tariff, so that is maintained and

so that concern has been addressed.

The second concern is, well, that is directly related to our farm

program. Does, then, what we have done undermine the farm program? The answer to that is no. So I think when it comes to the

dairy industry’s concerns, we have addressed them pretty effectively.

Now, would they have preferred, obviously, not to have any additional dairy coming into this country? That is probably a fair statement, that they would prefer not to have that. But I think the

major concerns that they had, we have addressed. I feel pretty comfortable with that.

I know they have a list of other issues not related to this agreement that they are interested in trying to develop and push forward in promoting their product or securing their markets, not just

here, but abroad. I think the administration will continue to work

with them on those issues.

Senator SNOWE. What has been the reaction of the Australian

dairy industry with respect to this agreement?

Mr. JOHNSON. Well, I think it is fair to say that they did not get

everything that they wanted out of this agreement by a fair

amount. Their expectation originally was a completely free market

with the United States.

Having said that, I think they realize that there are economic opportunities for them here as well. Again, sometimes these products

become complementary. As I mentioned, some of the products, we

have a higher growth factor on just simply because they are products we do not produce as much of.

But I think it is fair to say that they recognize that it is a benefit

to them, but maybe not everything that they had expected.

Senator SNOWE. Ambassador Allgeier, on the Moroccan Free

Trade Agreement, as we know, the wood and lumber industry in

this country has been devastated by their inability to have access

to other countries.

I know, as a State that represents the wood products industry,

I can tell you that their competitors in other parts of the world

have truly had an enormous competitive advantage because of the

high tariffs and the escalation of those tariffs applied to U.S. wood

products.

I understand under this agreement that there really is a long

staging process with respect to the tariffs. I understand it is going

to be 8 years.

What impact is that going to have on our industries? I mean, it

is going to take a long period of time to obviously phase out these

tariffs, as I understand it, under this agreement. Is that correct, for

the wood products industry, 8 years?

Mr. ALLGEIER. Some of the wood products go into Morocco with

a faster phase-out of the tariffs, 5 years instead of 8. Of course, we

work with our industry to identify those products which are of

highest priority in terms of their market access objectives.

Senator SNOWE. So some of them are going to be 5 years instead

of 8.

18

Mr. ALLGEIER. Yes.

Senator SNOWE. Was there a reason why this just could not be

done immediately? I mean, obviously it would provide a better opportunity.

Mr. ALLGEIER. Well, it is all part of the negotiation. It is all part

of the negotiation. We certainly try to get tariffs eliminated as

quickly as possible on our priority products, and certainly wood and

paper products are very high priority for us, as indicated in our

proposals to have these go to zero in the WTO negotiations.

Senator SNOWE. Well, I hope we do not use this as a basis for

future free trade agreements, this slow process, because it really

has had an impact on the wood and paper products, and the lumber industry I know has been devastated because they have not

had equal access to other countries.

They have had to face these tariff and non-tariff barriers that

have really limited their ability to compete in other countries. We

ought to be striving for immediate elimination of those tariffs. So,

five, eight years is not, clearly, ideal under the circumstances.

Mr. ALLGEIER. Let me assure you that we place a very high priority on this industry. They are one of the strongest supporters of

liberalizing trade. Actually, Ambassador Zoellick is meeting this

week with key CEOs from this industry to talk about our joint

strategy going forward, and we certainly do not accept this as the

baseline for future negotiations.

Senator SNOWE. Well, we have had low and non-existent tariffs

on wood products entering the United States, and I just think

enough is enough at this point. We ought to be very aggressive in

pursuit of fairness and equity for this industry that has been long

hard hit by unfair trade practices, as well as tariffs.

Mr. ALLGEIER. We certainly agree with that.

Senator SNOWE. Thank you.

Senator BAUCUS. Thank you, Senator.

Thank you all, panelists, for helping us out here and providing

your testimony.

We will now turn to the next panel who will speak on the U.S.-

Australia Free Trade Agreement. I would like to welcome Harold

McGraw, who is chairman, president, and CEO of The McGrawHill Companies, who has traveled here from New York to testify

on behalf of the Business Roundtable.

Jon Kneen, who is chairman of Al-Jon, Incorporated, is from

Ottumwa, Iowa, and will testify on behalf of the National Association of Manufacturers.

Lynn Cornwell, a cattle rancher from Glasgow, Montana, a member of the Montana Stock Growers, will testify next.

He will be followed by Jeff Ruffner, senior vice president and

general manager of MSE Technology Applications of Butte, Montana.

Mr. McGraw, why do you not begin?

19

STATEMENT OF HAROLD McGRAW III, CHAIRMAN, PRESIDENT

AND CEO, THE McGRAW-HILL COMPANIES, NEW YORK, NY,

ON BEHALF OF THE BUSINESS ROUNDTABLE

Mr. MCGRAW. Thank you very much, Senator. Thank you to this

entire committee for the leadership that you have brought forth on

trade.

Mr. Chairman, I am Terry McGraw. I am chairman of the Business Roundtable’s International Trade and Investment Task Force,

and I am chairman, president and CEO of The McGraw-Hill Companies.

It is a pleasure to be here speaking about support of the U.S.-

Australia Free Trade Agreement on behalf of the leading U.S. corporations, with a combined workforce of more than 10 million employees in the United States.

Mr. Chairman, Senator Baucus, and the committee, I again

thank you for your leadership in moving the trade agenda ahead.

Since the time that this committee pushed to restore trade promotion authority, much has taken place: the Singapore Free Trade

Agreement, the Chile Free Trade Agreement, we are now talking

about Australia and Morocco, and soon the Central American Free

Trade Agreement with the Dominican Republic, then Bahrain. Mr.

Chairman, America is on the move.

The Business Roundtable believes that the U.S. policies that promote trade like the U.S.-Australia Free Trade Agreement, coupled

with policies that promote education, training, investment and innovation, will result in more economic growth and job creation in

the United States and a strengthening of ties and relationships

with our partner nations. It is a win-win situation and one that we

must seek.

Ninety-five percent of the world lives outside the United States.

U.S. trade agreements designed to open up foreign markets are

more important than ever. Isolating the United States from the

world economy is a losing strategy for American companies, its

workers, farmers, and consumers.

Although the simple truth often gets lost in the popular debate,

there is an increasing array of economic evidence that is clarifying

and quantifying the benefits of open economics and expanded

trade.

I have included with my written testimony a copy of our recent

report, ‘‘Securing Growth in Jobs: Improving the U.S. Prosperity in

a Worldwide Economy,’’ which sets out the facts and details.

Mr. Chairman, as you previously noted, I have just returned

from trips to China and to Europe, and I can tell you firsthand that

the government and business leaders that we met with are looking

to the United States for this leadership and moving the trade agenda ahead.

For many years, the United States lost ground to its foreign competitors who, recognizing the benefits of trade liberalization, forged

ahead with one bilateral free trade agreement after another.

Prior to the enactment of trade promotion authority, the European Union, as we know, had 27 free trade agreements in force and

was negotiating another 15, compared to just three free trade

agreements benefitting America at that time.

20

Mexico had free trade agreements in effect with at least 28 countries. Even Japan was considering free trade agreements with six

trading partners. The United States’ companies and their workers

were forced to stand on the sidelines and export opportunities were

lost.

This committee’s leadership and Congressional enactment of

trade promotion authority got us back on the field. Today, because

of Congressional action, the U.S.-Singapore and U.S.-Chile free

trade agreements are already helping to boost U.S. exports and employment.

The U.S.-Australia Free Trade Agreement is another important

opportunity for promoting U.S. economic growth and the good jobs

that come with it. We urge the Congress to put this agreement to

work for the United States.

The U.S.-Australian trading relationship has always been a

strong one. Our trade surplus with Australia has been a growing

one, and steadily. Australia, like the United States, is an advanced

economy. Workers in both countries earn similar wages and both

countries have the same strong commitment to workers’ rights and

environmental protections.

The U.S.-Australia Free Trade Agreement would improve this

picture even more. We can expect gains from the U.S.-Australia

Free Trade Agreement because the agreement includes a number

of key features sought by both Congress and American businesses

at the outside of these negotiations.

Our negotiators have done a terrific job for their insistence that

the agreement specifically expand market opportunities for U.S.

goods and services and provide a higher level of certainty regarding

investment rules.

Mr. Chairman, sector by sector this free trade agreement is a big

plus for America, yet we should also recognize its importance to

overall U.S. trade policy. Implementing the free trade agreement is

important in keeping the momentum of trade liberalization going.

Indeed, it is no exaggeration to say that the world is watching

what Congress does with this agreement. Delay in approval could

slow down other negotiations under way, whether they be bilateral,

regional, or multilateral levels.

Forward-looking trade policies that include the U.S.-Australia

Free Trade Agreement will create increased economic opportunity

and higher standards of living. A retreat on trade, which no one

is suggesting, would imperil the prosperity and the quality of life

available to Americans of all ages and walks of life.

Further, it would be inconsistent with the leadership expected by

us of our global partners. Every generation faces new challenges.

Our challenge is found in a global economy with new requirements,

new dynamics, and many new players.

Our world is different and it is changing at a stunningly rapid

pace. It is in our Nation’s best interests to align our economic and

commercial interests with the increasingly complicated geopolitical

picture that we face.

Mr. Chairman, in closing, we urge this committee and Congress

to approve the U.S.-Australia Free Trade Agreement which advances our broad range of interests with Australia, a longtime

21

friend and ally of our Nation, and further demonstrates U.S. leadership on trade policy.

Thank you for hearing those views.

The CHAIRMAN. Thank you, Mr. McGraw.

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

The CHAIRMAN. Now, Mr. Kneen?

STATEMENT OF JON KNEEN, CHAIRMAN, AL-JON, INC.,

OTTUMWA, IOWA, ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. KNEEN. Thank you, Mr. Chairman, Senator. My name is Jon

Kneen. I am the founder of a company called Al-Jon, a manufacturer based in Ottumwa, Iowa.

I am here to represent my company and the National Manufacturers Association regarding the benefits of the U.S.-Australia Free

Trade Agreement.

Our company, Al-Jon, designs, manufacturers, and markets machinery used to recycle scrap metals and manage wastes in an environmentally friendly fashion. This equipment includes car crushes, metal balers, metal loggers, hydro-tractors with engine pullers,

and landfill compactors.

Our machines process old junk cars, refrigerators, stoves, and

other light metal gauges for recycling purposes. Then our landfill

compactors are used to demolish, compact, and reduce waste and

garbage into an environmentally acceptable condition.

Al-Jon is over 40 years old. The company is privately owned by

my family and in the second generation. We do not employ quite

as many as you do. We only employ 100 people. But they are good

people.

People in Ottumwa, and our ability to sustain growth for our

local workforce, are increasingly dependent on our ability to penetrate new markets abroad. Today, we export approximately 10 to

15 percent of our production. In recent years, this has included a

number of sales to Australia.

While we have numerous potential customers in Australia, our

sales have been limited by two factors there: the 5 percent tariff

the Australian government charges on our exports, and the cost of

shipping our heavy equipment that far.

The U.S.-Australia Free Trade Agreement will immediately

eliminate the first factor, the 5 percent duty. I believe this will

greatly enhance our prospect of expanding trade and sales to Australia.

Let me explain. Our products are highly technical, highly valued

manufactured goods. For example, an Al-Jon car crusher is priced

at $118,000. The duty paid by our Australian customer on each of

these is nearly $6,000, which is no small piece of change. No Australian company that I know of makes similar equipment. Our

main competition for business in that country comes from Europe.

Once Congress approves the FTA and it goes into effect, we will

gain an immediate $6,000 advantage over our competitor, giving us

strong reason to believe that we can significantly expand our sales

of car crushes and other equipment which would receive similar

duty breaks.

22

The instant competitive advantage that Al-Jon will receive from

the agreement would be achieved by many other American manufacturers. Mr. Chairman, if you say, give me one good reason to

support the U.S.-Australia Free Trade Agreement, I would say I

will give you 19,000 reasons.

That is the number of U.S. companies that already export to

Australia, according to the Census Bureau. My company is far from

being alone in the small- and medium-sized manufacturers exporting to Australia. Over 85 percent of all U.S. exports to Australia

are small- and medium-sized firms.

Australia is already a great market for smaller U.S. firms and

the trade agreement is only going to make it better. The NAM,

which represents 14,000 U.S. manufacturers, includes 4,000 large

firms and 10,000 small and medium companies like ours. We believe the benefits are so widespread and substantial that we have

taken to calling the deal with Australia the Manufacturers’ Agreement.

The U.S.-Australia FTA deserves that label because 96 percent

of all U.S. exports to Australia are manufactured goods. Over 99

percent of Australian duties on U.S. manufactured goods will be

eliminated the moment this agreement goes into effect. That is an

unparalleled achievement.

In previous trade, many had industrial trade-offs that were

phased out in 5 to 10 years, delayed the benefits available to competitive American companies like mine, but the Australian agreement, to an extent, provides immediate cost-saving benefits to AlJon and other manufacturers.

The NAM estimates that the accord could result in $1.8 billion

annual sales for U.S. manufacturers’ exports to Australia.

Another reason this agreement is so commercially meaningful to

American manufacturers is the fact that it is built on an extremely

solid trade and investment relationship already in place.

The United States sold more than $12 million in manufactured

products to Aussies last year, and we are the largest bilateral industrial trade surplus in the world, nearly $7 billion in the United

States favor. Building on this strong foundation, FTA should allow

us to further integrate economics and expand our Australian market.

I have made comment on the non-tariff barrier government procedures and customer procedures, and other ones. They are in my

brief, which you may want to read.

In conclusion, I would like to thank you, Mr. Chairman and the

members of the committee, for listening to the views of Al-Jon and

the National Manufacturers Association on this important agreement.

We strongly urge that your committee and Congress approve the

agreement as soon as you can so that American manufacturers

such as myself can begin to take care of the lower barriers and

stronger rules provided.

Thank you.

The CHAIRMAN. Thank you, Mr. Kneen.

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

The CHAIRMAN. Now, Mr. Cornwell?

23

STATEMENT OF LYNN CORNWELL, RANCHER, MONTANA

STOCKGROWERS, GLASGOW, MONTANA

Mr. CORNWELL. Thank you, Mr. Chairman, Senator Baucus, and

other members of the committee. My name is Lynn Cornwell. I am

a rancher from North Central Montana in Glasgow.

I appreciate the opportunity to testify today on behalf of the

Montana Stockgrowers Association on an issue that is very important to the livestock industry in our State.

Agriculture has long been the cornerstone of Montana’s economy

and maintaining the viability of that industry is vital to our economic growth in Montana. As livestock producers both in Montana

and nationwide work to become more efficient in increased production, it is critical that we have the ability to market our product

to 96 percent of the world’s population that lives outside our borders.

Trade agreements such as the Chilean Free Trade Agreement, as

well as the recently negotiated Moroccan and Central American

agreements, have the potential to create new marketing opportunities for our products.

As an industry, however, we generally support the negotiation of

multilateral agreements, as they are much more likely to improve

trade conditions for U.S. agricultural producers than would bilateral agreements with nations whose export strength rests in their

agricultural production.

We also believe that these multilateral negotiations provide our

industry with the only mechanism to reduce high tariffs in Japan

and South Korea, our number one and number three markets, as

mentioned earlier, for U.S. beef exports.

That said, we recognize that a country like the United States,

with its diverse production capability, must approach trade negotiations from a broader position than from any single industry segment. As this committee and the entire U.S. Senate proceed to consider any bilateral agreement, there are a number of issues that

must be addressed.

This issue is of such significance in Montana that the 58th Montana legislature passed overwhelmingly HJR 17. That resolution

identifies the following provisions that must be addressed in any

bilateral agreement signed by the United States.

The United States’ farm programs within this country may not

be unilaterally reduced or phased out. Agricultural tariffs in this

country may not be further reduced unless the other country reduces its tariffs to the United States’ levels. Market access must

be reciprocal. Non-tariff barriers must be eliminated. Export subsidies must be harmonized or eliminated.

Last, health requirements for imports must be strictly adhered

to, and utmost caution must be used to protect the U.S. livestock

industry from bovine spongiform encephalopathy, otherwise known

as BSE, foot and mouth disease, bovine tuberculosis, and other

highly transmittable diseases.

In the case of the Australia Free Trade Agreement, it is our opinion that the goal of these negotiations should have been to prevent

any potential negative impact on our beef industry until such time

as our industry would have an opportunity to increase our ability

24

to export more of our product as a direct result of a successful WTO

agreement.

Even though the last two WTO meetings have yielded very little

progress, we acknowledge and appreciate the untiring effort of U.S.

Trade Representative Zoellick to not abandon this important process.

While the Australia agreement is unusual in that it provides

very little benefit to Montana agriculture, we appreciate Senator

Baucus’ efforts to assure that the Australian Free Trade Agreement contains adequate safeguards for the U.S. beef industry.

Thank you.

We fully anticipate that a new WTO agreement will be in place

well before the next 10 years when the first changes in the terms

of trade with Australia begin to take place, the expectation being

that a WTO agreement will increase market access and beef trade

globally and that such an agreement would mean greater access for

U.S. beef around the world via a multilateral reduction in tariffs

on beef and an expansion in the size of TRQs.

As economies around the world improve, we need to position ourselves to compete via fair trade for the anticipated increase and anticipated demand for higher quality beef products.

In summary, and in view of an obvious decision to move forward

with a bilateral agreement, we simply ask that you provide adequate safeguards for the U.S. beef industry in such agreements

until new market opportunities can be provided through WTO negotiations.

Thank you, Mr. Chairman and Senator Baucus.

The CHAIRMAN. Thank you, Mr. Cornwell.

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

The CHAIRMAN. Now, Mr. Ruffner?

STATEMENT OF JEFF RUFFNER, SENIOR VICE PRESIDENT

AND GENERAL MANAGER, MSE TECHNOLOGY APPLICATIONS, INC., BUTTE, MT

Mr. RUFFNER. Chairman Grassley, Senator Baucus, I would like

to thank you for the opportunity to speak today on what I believe

are the positive impacts of the Australia Free Trade Agreement on

a company such as ours.

First, if I may provide some background. Our company is a small

engineering and research company located in Butte, Montana. We

employ 200 people, with the majority being highly-skilled engineers, scientists, and technicians.

We currently have three significant business lines in addition to

our standard engineering services. They include aerospace research, engineering and technology for the defense industry, and

engineering and technology for various waste clean-up applications.

The nature of our work limits the services and products that we

may market overseas. However, we do have specialty engineered

products and services for waste clean-up and supervisory control

and data acquisition products that lend themselves well to the

overseas market.

Now, you may ask, why is a small company in Butte so interested in the Australia Free Trade Agreement? The answer is, beVerDate 11-MAY-2000 13:52 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 95480.000 SFINANC2 PsN: SFINANC2
25

cause we must be. The nature of today’s world and increased

globalization means even a small company in Butte must look globally if they are to succeed. Clearly, the future expansion of certain

portions of our business must be overseas to ensure our long-term

success.

Now, while neither I nor our company has experienced and credentials comparable to many of today’s speakers, we—and I, personally—have the battle scars and lessons learned from our adventures overseas. Our company has provided specialty engineered

products or services in Japan, Korea, Poland, Greece, and the U.K.

While most of these adventures have been successful, they have

certainly provide some valuable insight to the issues associated

with international business development, marketing, and execution.

I look at all the free trade agreements our country is currently

pursuing very parochially. I follow some with great interest and

some with no interest at all, based on the potential for our company.

Because we are a specialty engineering business, we focus on

highly technical market niches. When evaluating our overseas market potential for our company and where to put our limited resources, we need to look at the product or services, the need for

that in their country, the state of the industry in the country, the

regulatory enforcement framework, financial situation, and, of

course, the likelihood of payment. Certainly Australia has always

met these criteria, and is even now more attractive based on this

agreement.

I am sure my experiences do not differ dramatically from anyone

else who has tried to develop business overseas: the language differences, cultural differences, as well as business practice are what

make it interesting.

However, the rubber meets the road on the business practice

issue. Transparency and a clear, well understood set of rules which

all are working to are a necessity for a small business when working overseas.

I can make the determination for myself as to my interest in participation in that market as long as I know the rules of the game.

I believe that this agreement clearly lays out the rules and the

guidelines for the game in Australia.

I am very pleased we have signed the Australia Free Trade

Agreement and look forward to implementation. The agreement

clearly outlines a path forward for development of professional

service, and clearly delineates the requirements for government

procurement, two areas in which I have a keen interest.

However, I believe the most important aspect of the agreement

is the overall delineation of a transparent and clear set of rules and

guidelines by which we all work. Australia is certainly not a market in which we have previously participated, but it is in the same

region that we need to be.

It clearly meets our internal requirements, and this will help us

make our decision, as well as our financial resources at the time

to look into expanding it to Australia.

I would like to take this opportunity to thank all of those from

the Office of the U.S. Trade Representative and all the other agenVerDate 11-MAY-2000 13:52 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 95480.000 SFINANC2 PsN: SFINANC2
26

cies who have participated and worked so hard to get this agreement negotiated and finalized.

I would also like to thank Chairman Grassley, Senator Baucus,

and the other members of the committee for giving me an opportunity to speak today. I would go on record in support of this agreement. This agreement has outlined the rules of the game and created a fair and level playing field for our business. The rest is up

to us. The government can only do so much.

Thank you very much.

The CHAIRMAN. Thank you.

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

The CHAIRMAN. We will take five-minute rounds.

Mr. McGraw, I am going to start with you. I think you laid out

very clearly the advantage of the U.S.-Australia agreement, because 99 percent of our manufactured exports will become duty-free

immediately.

From your perspective, speaking for the Business Roundtable,

could you elaborate on the potential impact of the Australia Free

Trade Agreement on U.S. manufacturing jobs and job growth? In

other words, where it makes a real difference to the people of this

country if we create jobs.

Mr. MCGRAW. Yes, I can. Thank you, Mr. Chairman. I think that

at the outset, the agreement really solidifies the relationship that

has grown already very significantly. Right now, we have trade of some $26 billion, with a nice surplus

accounting for the Australian investment in the United States,

which accounts for some 80,000 jobs. I think that with increased

investment here, you are going to see a nice increase of jobs somewhere probably in the 10, 15 percent range immediately.

I think that you are also going to be able to see correspondingly

the benefit that Australia will achieve in terms of being able to

house American interests in Australia.

So, I think it is one that is really going to be more incremental

in strengthening an already strong relationship and I think a terrific model for what good trade policy should be.

The CHAIRMAN. Mr. Kneen, your presence here is a reminder of

a very positive impact that trade was going to have on our small

manufacturers. I think you noted in your testimony that over 85

percent of all U.S. exporters to Australia fall into this category of

small- or medium-sized firms.

Could you elaborate on the competitive advantage that your firm

stands to gain from the Australian agreement, in effect, in terms

of duty differential? I think you touched on that in your testimony,

so maybe you do not have to go about the duty differential. But in

terms of easier access to the Australia market versus your competitors.

Mr. KNEEN. It is going to be helpful to many small manufacturers in the United States. You heard from one in your own State,

Vermeer, which builds equipment that they sell a lot of in that

country. We sell some, but not as much as they do.

But, yes. The immediate relief we get will give us a much more

competitive advantage to our European people that build similar

type things. Duty will be the main thing. Freight probably is not

27

going to change too much, other than as we begin to ship more we

may be able have a little more competitive relationship with

freight.

The CHAIRMAN. All right.

And Mr. Cornwell, as you know, this agreement contains a volume-based safeguard which will terminate in 18 years. This safeguard will be replaced with a permanent price-based safeguard for

beef. Do you know if the United States’ producers are generally

aware of those safeguards?

Mr. CORNWELL. I do not know that. I assume they are. I think

most producers are so euphoric about trade and generally accept

the enhanced opportunity to sell these products, that they are willing to live with the restrictions and the time allotted. It is going

to take some time to get all this done, but I think most producers

are pretty comfortable with that.

The CHAIRMAN. All right.

Mr. Ruffner, you testified about the lessons that your company

has learned. You called them ‘‘adventures’’ doing business overseas

as a small engineering company. Could you share with the committee an example of a problem that your company had doing business in a foreign country and how the U.S.-Australia FTA will establish clear and transparent rules that will prevent such problems

in the future, particularly for small companies?

Mr. RUFFNER. Well, certainly. I have spent much time in Taiwan

and really have nothing to show for that. I think that is clear because we were dealing typically with government agencies, and

government agencies in which I really did not speak the language.

I was relying on interpreters. They had a lot of middle men working with major engineering companies.

So, our experience there has shown that I wasted a lot of time

because we did not have the government procurement rules set up

in place. Most of our technology is either going to go to the government of that country or to a rather large engineering company.

And just that whole experience as part of the lessons learned,

that clearly the transparency, the set of rules for government procurement and for professional services, from our standpoint, is

what is needed.

I like to look back on that with fondness, because I think I am

a lot smarter because of it. Clearly, that highlights the direction

that we will move in the future.

The CHAIRMAN. All right.

This agreement contains a cutting-edge provision on e-commerce

and our two countries will be cooperating on e-commerce issues to

facilitate government procurement.

As an engineering firm, does your company provide any goods or

services by electronic means, and will the existence of e-commerce

provisions in the agreement make it easier for your company to access the Australian market?

Mr. RUFFNER. Yes, it will. First of all, like I said, we have not

been to Australia yet. We have spent most of our time in Korea,

Taiwan, and Japan. But, also, we have moved drawings, we have

moved things back and forth electronically with those other countries. Given the language similarities, almost, the cultural similarities, it will make it very easy for us.

28

The CHAIRMAN. All right. Thank you all.

Now, Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Cornwell, what are the best foreign market opportunities for

cattle, for beef?

Mr. CORNWELL. Currently, Japan, Korea, Mexico, Thailand, as

you well know. You have made more trips to the Orient than anyone on behalf of Montana producers, but nationwide as well.

Senator BAUCUS. So you are saying, basically, Asia.

Mr. CORNWELL. The Asian market.

Senator BAUCUS. Asian markets.

So what can we do more to help? I guess it is pretty obvious, just

to get Japan to open up again.

Mr. CORNWELL. That is the real importance of signing this free

trade agreement with Australia, is, if you will, to give us some leverage to help renegotiate to lower the tariffs with Japan and

Korea. Japan is currently 50 percent, Korea is 40 percent, I believe,

and Thailand is as high as 80 percent.

We really need to be able to sell more product to these countries

with a lower tariff. As a result of signing these free trade agreements, I think we will have that opportunity.

Senator BAUCUS. Are you concerned about Argentina or Brazil or

other countries down the road?

Mr. CORNWELL. Well, having been familiar with the industry the

last several years, there are so many animal health issues and so

many restrictions, that those countries were being watched carefully by USDA. I am not real fearful of that.

And they raise a different kind of beef. Frankly, we are the highend producers of the grain-fed beef and we have a different market

than they do. As an example, when we export a pound of beef,

maximum, it is $1.66 in value. What we import is $1.21. We need

to be able to sell our products to other countries, as you well know.

And we will get a higher value for them. If we keep them here,

we grind them and they become ground. So, putting dollars in our

producers’ pockets makes a lot of sense. I really do not see a lot

of competition from Argentina and Brazil in the near future.

Senator BAUCUS. The main thing is just to get more aggressive

and get these markets opened.

Mr. CORNWELL. Yes, sir.

Senator BAUCUS. Thank you.

Mr. Kneen, I was just curious, since you are in, as I understand

it, somewhat in the scrap metal recycling business. So what about

China? I read that China wants all the scrap metal in the world.

Mr. KNEEN. They are buying all the scrap metal in the world.

Senator BAUCUS. Are you selling it to them?

Mr. KNEEN. Yes. China is a very big factor in the steel market.

Today, the major part of scrap metal from this country on the west

coast is exported directly to China, and they are making steel and

selling it back to us, in some instances, plus building automobiles.

No, it is very much of a factor in that business.

Senator BAUCUS. Do you expect that to last a little while, too, as

long as China does grow?

Mr. KNEEN. Yes, it looks like it ought to be a fairly long-time arrangement. In some instances it is very good, and in some inVerDate 11-MAY-2000 13:52 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 95480.000 SFINANC2 PsN: SFINANC2
29

stances it is not real good, but it is something that we have to

learn to live with and be competitive with.

Senator BAUCUS. Right. That is interesting.

Mr. McGraw, could you kind of tell us a little bit about the platform potential for trade and U.S. trade with Australia?

My guess is that if we increase our trade with Australia, the esti- mates I see up to $2 billion more a year, that there are also opportunities to use that as a springboard for Southeast Asia and other

countries.

Could you expand on that a little bit, please?

Mr. MCGRAW. Well, I think so. Senator, as we have discussed before, trade policy overall establishes a language by which nations

can discuss economic growth and can talk about job creation. To

show the kind of momentum that we have shown in the last year

and a half, establishes a platform, I think, for others to want to cooperate, to want to be a part of that kind of expansion.

I think that the progress we have made to date, and if we can

get passage of Australia and then Morocco, I think it sends a tremendous message about the openness with which the United

States wants to achieve a much broader framework for those kind

of discussions, and I think that will lead to even more.

My hope is that our progress will also open up more impetus to

get back to the Doha Round, to get regional agreements like the

Free Trade Area of the Americas back on the agenda. But at this

point, it is going to be back to bilaterals. To show this kind of

progress and this kind of momentum, I just think establishes a terrific precedent to get it done.

Senator BAUCUS. I appreciate that. My time is running out here.

Mr. Ruffner, Montana is known for many things, and one is agriculture. But could you tell us what more our country could do, either the USTR or other agencies, to help small manufacturers,

small engineering companies? Not the Morris and Knudsens. They

do all right by themselves. But some of the smaller firms in our

State, as well as other States. How do we get them rolling even

more in future agreements?

Mr. RUFFNER. And I appreciate the question because I get that

from, actually, a lot of folks in the government, what can we do

more to help. From my perspective, the company has to, first of all,

decide, do they want to go overseas. I have been fortunate. We

have been able to look and decide that we need to be overseas if

we are going to succeed. In Montana, we call it strategically isolated. That is what we are.

But once the small company makes the decision to go overseas,

I think where I have found critical support, to be honest, is with

the Commercial Service at the embassies. I have had excellent support from those offices. Those folks go out of their way to help us.

You could go into a country and spend 2 days and have a good feel

for whether you have a market there or not.

If I could encourage anything, I would encourage strengthening

those offices. Currently they charge for their Gold Key service. I

think it is well worth it. But many other small companies may not

be able to afford that. Maybe make that more affordable.

Also, on the free trade agreements, as I go through these, some

of it, as the term goes, is above my pay grade. But what I need

30

to look for at these free trade agreements is whether 10 percent is

the right number, 5 percent is the right number, I do not know.

What I need to know, is what the ground rules are, because

when I know the ground rules I can figure it out for myself. Basically, once you get to that point it is up to us. We either have a

good product to sell or not, and we are on our own.

Senator BAUCUS. So, more transparency, and just know what the

rules are.

Mr. RUFFNER. That is right. As long as I know the rules and

know what is going on, I can make the rest of the decisions and

rely on myself to go forward.

Senator BAUCUS. Thanks for taking the time to come. It is a long

distance. Both of you. Thank you very much.

The CHAIRMAN. Thank you very much.

I would call the next panel. Would you come while I make an announcement to the rest of the committee?

Because of the vote that we are expecting at 12:15, members cannot accommodate the meeting scheduled to consider the Burma resolution, so we will postpone that meeting and hopefully consider

the resolution off the floor later today.

Our third panel is testifying on the Morocco Free Trade Agreement. I would welcome John Schulman, corporate executive vice

president and general counsel of Warner Brothers Entertainment,

Burbank, California, to testify on behalf of Time Warner and the

Entertainment Industry Coalition for Free Trade.

Then, David Mengebier, senior vice president of governmental

and public affairs at CMS Energy Corporation. He is from Jackson,

Michigan.

Then we have a friend of mine, Ron Heck, who will speak on behalf of the American Soybean Association. He is president of that

association and he is also a family farmer in Perry, Iowa.

Our last witness is Lochiel Edwards, who is president of the

Montana Grain Growers Association, and he is a producer from Big

Sandy, Montana.

Let us go in order. Mr. Schulman, go ahead. Oh, let me say

something else. I alluded to this, but just in case we do call a vote

at 12:15, we will now shut down. One of us will go vote and continue the hearing and then come back and the other person will go

vote. Just so you understand, we are not running out on you.

Mr. Schulman?

STATEMENT OF JOHN SCHULMAN, CORPORATE EXECUTIVE

VICE PRESIDENT AND GENERAL COUNSEL, WARNER BROTHERS ENTERTAINMENT, BURBANK, CALIFORNIA, ON BEHALF

OF TIME WARNER AND THE ENTERTAINMENT INDUSTRY COALITION FOR FREE TRADE

Mr. SCHULMAN. Thank you very much, Mr. Chairman.

First, on behalf of Warner Brothers and Time Warner and the

Entertainment Industry Coalition, I thank you for the opportunity

to be here today to discuss the benefits of the U.S.-Australia and

U.S.-Morocco Free Trade Agreements.

Our company, the Entertainment Industry Coalition, and the

U.S. workers and creative talent we represent strongly believe that

both agreements will create valuable opportunities for our industry

31

that will result in new jobs, will increase exports, and will bring

in revenue to help reduce our trade deficit.

As an indication of our own company’s strong support for both

agreements, Time Warner has served as co-chair for both the

American-Australia Free Trade Agreement Coalition and the U.S.-

Morocco Free Trade Agreement Business Coalition.

Through Time Warner, Warner Brothers is a member of the Entertainment Industry Coalition which represents the interests of

men and women who produce, distribute, and exhibit many forms

of creative expression, including films, videos, TV programming,

music, and video games.

Our members are programmers, exhibitors, producers, distributors, guilds and unions, trade associations, and individual companies involved in the industry. That industry is one of the U.S.

economy’s greatest assets. We create more than 5 percent of the

Nation’s GDP. We bring in more international revenues from exports than aircraft, agriculture, automobiles, or auto parts.

We are creating new jobs in the United States three times the

rate of the rest of the economy. Our movie industry alone has a

surplus balance of trade with every single trading partner in the

world.

But our industry is under attack. There are two primary threats

we face: market access barriers and lax or non-existent anti-piracy

laws or enforcement. We seek not special treatment, but elimination of special impediments.

Market access barriers prevent the U.S. entertainment industry

from competing in many countries where the market is instead

ceded to the locals. Tariffs and quotas are examples.

Piracy, whether physical or online, is having a devastating impact on our industry. It is growing dramatically with the advance

of digital technology. Without strong protection, the ability of the

entertainment industry to continue to export, to expand jobs, and

to increase revenue from international trade is being jeopardized.

These troubling trends increase the importance of international

trade agreements, including those with Australia and Morocco.

Why are we such big supporters of both? First, both agreements include strong intellectual property rights protections that will allow

our industry to continue to grow and prosper.

Both agreements have important market access provisions, including zero tariffs on all our products, resulting in both market access and national treatment for all of our services and products.

Finally, both agreements are important statements to the rest of

the global trading community that high standard commitments in

trade and cultural products can be made in a way that opens markets while still promoting cultural diversity.

Specifically, both agreements include provisions that go beyond

the TRIPS protection. Both agreements establish strong anti-circumvention provisions to prohibit tampering with technologies designed to prevent piracy and unauthorized Internet distribution.

Both agreements protect copyrighted works for extended terms,

in line with emerging international trends, to allow companies like

ours to reinvest, to restore older works, and to take the significant

risks necessary to create new ones.

32

Finally, and most importantly, both FTAs strengthen IP enforcement by increasing criminal and civil penalties and authorizing the

seizure, forfeiture, and/or destruction of pirated products and the

equipment used to produce them.

The entertainment industry’s top trade policy priorities are two:

ensuring market access for our products and services and protecting the intellectual property through strengthened laws and effective enforcement.

The Australia and Morocco agreements meet those goals. We

wish to continue to export our product, not jobs, and reduce, not

increase, trade deficits. The Australia and Morocco FTAs help us

do so. We urge their swift passage.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

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

The CHAIRMAN. Mr. Mr. Mengebier?

STATEMENT OF DAVID G. MENGEBIER, SENIOR VICE PRESIDENT, GOVERNMENTAL AND PUBLIC AFFAIRS, CMS ENERGY

CORPORATION, JACKSON, MICHIGAN, ON BEHALF OF THE

U.S.-MOROCCO FREE TRADE AGREEMENT BUSINESS COALITION

Mr. MENGEBIER. Mr. Chairman, I am grateful for the opportunity

to testify today in support of the U.S.-Morocco Free Trade Agreement. I am here today representing both my company, CMS Energy, as well as the U.S.-Morocco Free Trade Agreement Business

Coalition.

The coalition is comprised of nearly 100 companies and associations, all of whom strongly support Congressional approval of the

FTA.

We believe the FTA is a high-standard, comprehensive agreement that will stimulate economic growth and opportunity in both

the United States and Morocco. It will advance the concept of a

Middle East free trade area and it will deepen ties with a country

that is a long-time and steadfast friend of the United States.

With your permission, Mr. Chairman, I would like to insert into

the record background materials prepared by the Morocco FTA Coalition, as well as the full text of my statement.

The CHAIRMAN. It will be included.

Mr. MENGEBIER. Thank you.

[The information appears in the appendix.]

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

Mr. MENGEBIER. CMS Energy is an integrated energy company

based in Jackson, Michigan. In Morocco, CMS operates and is the

50 percent owner of the Jorf Lasfar power plant, located in the

province of El Jadida on the Atlantic Coast.

This 1,356 megawatt $1.3 billion facility supplies approximately

60 percent of Morocco’s daily demand for electricity. For such investments to succeed, they must be based on partnerships with

host country authorities and stakeholders that entail collaboration,

trust, and a common vision.

33

By these standards, our experience in Morocco, where we are the

largest American investor, has been outstanding. In our opinion,

the proposed free trade agreement will dramatically expand levels

of trade and investment from the United States that will sustain

American jobs, promote U.S. exports, and increased revenues for

U.S. firms.

We believe that, as other U.S. companies establish themselves in

Morocco under the FTA, they too will bring new technology, best

practices, and vigorous corporate citizenship efforts, and likewise

strengthen the Moroccan economy. The FTA is truly a win-win

proposition.

In order to operate and maintain our facilities, we employ more

than 500 Moroccan nationals. Because electricity must be produced

in proximity to its market, let me underscore the fact that we did

not export one job from the United States in making this investment.

Instead, the Jorf Lasfar product created and sustains a variety

of U.S. jobs not only in Michigan, but also in places where our suppliers are based such as New York, Virginia, Tennessee, California,

Connecticut, the State of Washington, Washington, DC, New Jersey, and elsewhere.

In the area of Moroccan labor, the jobs that we have created in

Morocco include management level positions, pay fair wages and

benefits, and involve rigorous training and education programs.

We are more than pleased with the quality and sustainability of

the workforce we have created in Morocco. Morocco still has major

infrastructure requirements, including in the energy sector, and

the FTA will accelerate opportunities for U.S. companies to meet

those requirements and bring a similar approach to employment

and labor practices.

The labor situation took it a significant step forward with the

adoption last year of a new labor code, a development that many

believe was driven, in part, by the FTA negotiations with the

United States.

Over time, implementation of the new code will improve labor

conditions further still, creating stability and predictability for employers and other potential foreign investors.

On environmental issues, CMS has worked closely with Moroccan officials and other parties to implement world-class standards

on water quality and air emissions that utilized state-of-the-art pollution control technology and practices.

We have developed, for example, major recycling programs, including an effort to recycle 85 percent of the fly ash from the plant

for use in concrete production. In addition, we have collaborated

with local officials to implement strict environmental training,

monitoring, compliance, and reporting.

Since our facility has operated for several years, the FTA will not

affect the prices of major components and equipment that were

brought in for construction. That said, we import about $8 million

in goods and services from Europe and about $2 million from the

United States annually to operate and maintain the plant.

Since goods and services purchased from the United States are

subject to as much as a 42 percent Customs duty, we anticipate

that many of our go-forward O&M needs can be met instead more

34

cheaply from the United States once the FTA comes into effect and

these duties are eliminated.

The fact that the FTA includes specific coverage of energy service, while Morocco’s trade agreement with the EU does not, gives

an important advantage to U.S. service companies.

To conclude, both CMS Energy and the entire U.S.-Morocco FTA

Coalition urge the Congress to improve this important agreement.

I want to acknowledge your leadership efforts, Mr. Chairman, to

move the Morocco agreement quickly. It is a strong agreement. It

is good for the United States. It will serve as a standard for economic progress across the region and it will help an important

friend and ally in a key part of the world.

Thank you.

The CHAIRMAN. Thank you.

Now, Mr. Heck?

STATEMENT OF RON HECK, PRODUCER AND PRESIDENT OF

THE AMERICAN SOYBEAN ASSOCIATION, PERRY, IOWA

Mr. HECK. Good morning, Mr. Chairman.

The CHAIRMAN. Good morning.

Mr. HECK. I am Ron Heck, a soybean and corn farmer from

Perry, Iowa. I am currently president of the American Soybean Association, representing 25,000 producer members on national issues

of importance to all U.S. soybean farmers. ASA appreciates the opportunity to appear before you today.

ASA welcomes the conclusion of the free trade agreement negotiations between the United States and Morocco. The agreement is

fair. It does not exclude any products, and it creates opportunities

for our industry to export more soybean and livestock products to

Morocco.

We commend you, Mr. Chairman, for your active participation

and leadership in the process and for looking out for the needs of

soybean producers during negotiation of the agreement.

Morocco is an important market for U.S. soybean producers. It

imports approximately 300,000 metric tons of soybeans annually,

valued at $90 million. It also imports 300,000 metric tons of crude

soybean oil and 100,000 metric tons of soybean meal annually.

Let me quickly review the present pre-implementation status of

the soybean trade between Morocco and the United States. Currently, import duties are imposed on virtually all U.S. soybean

products entering the Morocco market.

Soybean seed imported for planting and soybeans imported by

the crusher has an assessed ad valorem duty of 2.5 percent. A differential duty is applied to soybeans imported for crushing.

In the case of soybeans imported for other forms of processing,

the duty is 22.5 percent ad valorem. The duty on soybean oil is

22.5 percent ad valorem, with an additional amount applied to

shipments for which the declared price is below a reference value.

The import duty is 25 percent ad valorem on soybean meal and

for high-value soy protein products used in human foods such as

soy flour, soy concentrate, soy isolates, and textured soy protein,

the assessed duty is currently 75.5 percent.

Under the FTA agreement, the duty on soybeans imported for

processing will be eliminated immediately. We expect this will benVerDate 11-MAY-2000 13:52 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 95480.000 SFINANC2 PsN: SFINANC2
35

efit U.S. exporters by at least partially offsetting aggressive pricing

practices by South American suppliers.

Currently, South American supplier countries do not have a free

trade agreement with Morocco, but receive most favored nation status which assesses a tariff rate equivalent to the pre-FTA tariffs

applied to imports from the United States.

The higher duty on soybeans imported for other forms of processing has made it uneconomical for feed compounders or others in

Morocco to invest in the production of full-fat soybean meal.

Full-fat soy is a product that would find a ready market among

produces in Morocco’s rapidly expanding and relatively advanced

poultry industry. Therefore, we applaud the elimination of the duty

on soybeans.

Duties on crude soybean oil will also be eliminated immediately.

Duties on soybean meal and other processed soy products will be

reduced by 50 percent in the first year of the agreement, and then

phased out over the next 5 years.

This should encourage expansion in the U.S.-Morocco soybean

meal trade. There have been occasional imports of soybean meal at

the current 25 percent duty rate, but the tariff has usually been

sufficiently high to protect the Morocco crushing industry from import competition.

While it is in the best interests of U.S. soybean producers for Morocco to continue to have a healthy domestic crushing industry, a

preferential duty on soybean meal allows the U.S. industry to compete for a share of Morocco’s rapidly growing market for livestock

and poultry feed.

We are satisfied with the timeframe given in the agreement

which will allow the Moroccan industry to adapt to increasing import competition from U.S. soybean meal.

ASA is also looking for opportunities to expand trade in highvalue, processed soybean products used for human consumption,

such as soy flour. As developing countries grow wealthier and can

afford a more nutritious diet, consumption of soy protein products

also grows.

Morocco is only beginning to become interested in soy for human

consumption because of the prohibitively high duty on these high

value products, and has made it difficult to import samples for

product demonstrations and other market development activities.

Therefore, we are pleased to see the initial 50 percent reduction

and eventual elimination of tariffs on these products.

In addition to increased opportunities for soybeans and soy products, there is a significant expansion in the market access for U.S.

beef and poultry products which are large domestic markets for the

United States.

The CHAIRMAN. Mr. Heck? Would you stop just there, and Mr.

Edwards? Senator Baucus will be right back. There is only one

minute for me to get over there. I have not missed a vote in 11

years and I do not intend to miss this one.

[Whereupon, at 12:27 p.m., the hearing was recessed to reconvene at 12:31 p.m.]

Senator BAUCUS. The committee will come back to order. I have

got to get caught up here. Were you testifying, Mr. Heck?

Mr. HECK. Yes. I was almost ready to conclude.

36

Senator BAUCUS. Why do you not proceed?

Mr. HECK. I will just wrap up and then we will pick it up again.

Senator BAUCUS. All right. Thank you.

Mr. HECK. I was just discussing the increased market access for

beef and poultry into Morocco, which we appreciate, since they are

good domestic markets for the U.S. soybean producers.

Previous to this agreement, there was no access to the Moroccan

beef and poultry markets, despite high demand in the restaurant

industry in Morocco for high-quality beef.

The agreement provides for a tariff rate quota for U.S. beef and

immediate access for certain poultry products. We understand that

certain sensitive poultry products, such as chicken leg quarters,

will have a lengthy phase-out of the TRQ and a permanent safeguard mechanism. However, this will be a new market that was

previously inaccessible.

We are also pleased that Morocco has adjusted their state trading enterprise system by eliminating special financing, increasing

transparency, and eliminating restrictions on the right to export to

give us a truly free market.

In conclusion, this agreement is very benefit to U.S. soybean producers and to our customers in the domestic livestock industry.

ASA strongly supports and urges quick passage of the Morocco

FTA.

I would be pleased to respond to any questions.

Senator BAUCUS. Thank you, Mr. Heck.

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

Senator BAUCUS. Mr. Edwards, thanks for coming all this distance again, and for your testimony.

STATEMENT OF LOCHIEL EDWARDS, PRODUCER AND PRESIDENT OF THE MONTANA GRAIN GROWERS ASSOCIATION,

BIG SANDY, MONTANA

Mr. EDWARDS. Yes. Good afternoon. It is an experience, getting

a plane out of Montana to Washington, DC. It always is.

Good afternoon, Senator Baucus. My name is Lochiel Edwards.

My family and I raise high-quality wheat on the prairies of Montana for domestic flour mills and for the export market.

I appreciate this opportunity to speak to you on behalf of the

three national organizations that represent America’s wheat growers: the Wheat Export Trade Education Committee handles trade

policy; the National Association of Wheat Growers addresses domestic policy; and the U.S. Wheat Associates handles export promotion for wheat. I also represent the Montana Grain Growers Association in my comments here today.

Let me begin by highlighting two points that wheat producers

look at when they are examining trade issues. First, as Mr.

Cornwell indicated earlier, 96 percent of the world’s consumers live

outside our borders.

That, of course, leaves 4 percent in the United States and our

wheat industry has got to have export opportunities to survive. We

grow a lot of wheat in this country and export 50 percent of our

total production. Back home in Montana, the figure is closer to 80

percent.

37

As you can imagine, every market, regardless of size, is important to us. Mr. Gilliland called to talk to me about the Moroccan

trade agreement the other day, and at first I thought he said

Monaco. I was pretty excited, even about that small market. I did

not know there was a Monaco free trade agreement, and obviously

there is not.

Senator BAUCUS. There is a big futures market in Monaco.

[Laughter.]

Mr. EDWARDS. Yes. Well, the great thing about that, is I think

they grow hardly any wheat, and I think they could pay for everything they bought.

But, nonetheless, we are excited about the Moroccan opportunities. We support bilateral and multilateral agreements wherever

they may be, as long as they are good for wheat.

Long-term, the WTO process is important for liberalizing the

world wheat trade. The U.S. wheat industry is clearly focused on

achieving our goals in this round of negotiations, and a completed

Free Trade Area of the Americas could even surpass these WTO expectations.

But we expect the larger WTO and FTAA agreements to take

some time, and we see FTAs as stepping stones to pave the way

for free and fair trade worldwide. As part of this process, the U.S.

wheat industry strongly suggests and supports the passage of this

agreement this summer.

This is an important agreement for wheat. Without the strong

determination of our U.S. Trade Representative’s office, the USDA,

and I happen to know the efforts of Senator Baucus, and probably

other members of this committee, we would have been excluded

from this agreement.

We firmly believe that no commodity should be exempted from

any free trade agreement. We know that once a commodity is allowed to be taken off the table, other countries will demand the

same right for what they would define as sensitive products.

We applaud the negotiators and the members of this committee

for the long, hard battle they successfully fought on behalf of the

U.S. wheat industry.

In the Moroccan wheat market, the United States has been

handicapped with regard to other origins in terms of proximity. European Union export subsidies are also a difficulty. Morocco’s

former colonial ties to Europe and a Moroccan import duty structure that puts U.S. wheat at a disadvantage to other origins are

all difficult positions, difficult factors when it comes to gaining

wheat’s place at the table in this free trade agreement.

Morocco has a tariff rate of well over 100 percent for durum and

other wheat that they could impose at any time.

Implementation of this agreement will phase out in-quota tariffs

on durum wheat over the next 10 years. The quota will start at

250,000 tons, which is compatible with current market levels, and

is set to grow by 10,000 tons per year thereafter. Unfortunately,

the tariff on durum beyond the quota will remain under most favored nation treatment and is not scheduled to go to zero.

For all wheat other than durum, the tariffs will continue under

this agreement. However, there is favorable provision to lower this

tariff.

38

The wheat industry understands that trade agreements must

take into account the internal needs of a population. Tariff rate

quotas were also established for all wheat products. While the

TRQs may serve as protection for Moroccan millers and bakers,

they also serve to quantify the levels of imports for these products.

We are extremely pleased that the negotiators secured in this

agreement a commitment on state trading enterprises that will

commit Morocco to working with the United States toward an

agreement in the WTO negotiations to do three things: eliminate

restrictions on the right to export; eliminate the special financing

granted to those state trading enterprises which export agricultural

products; and, third, to ensure greater transparency regarding the

operation of export state trading enterprises.

This is very important and we have asked the administration to

secure this commitment in all future free trade agreements, including those currently under negotiation and those yet to be initiated.

The final, and equally important, element of this agreement

guarantees that if Morocco provides any other trading partner better treatment for any product, Morocco must immediately provide

the same treatment for our product. We find this very important,

and it helps offset some of the reluctance of the Moroccan wheat

farmers to give up some of their advantages at this time.

The U.S. wheat industry applauds our negotiators for their hard

work and tenacity to reach this agreement for wheat. We strongly

support the agreement and urge Congress to pass it this summer.

Thank you for this opportunity to present these views from the

wheat industry.

Senator BAUCUS. Thank you very much, Mr. Edwards.

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

Senator BAUCUS. Let me just ask the four of you, generally, for

some guidance in future FTAs. These seem to be working, that is,

the Morocco and Australia, and we have had Chile and Singapore,

and so forth, and there is a lot of talk about FTAA, but that is pretty ambitious. There are some countries that are kind of difficult to

deal with on that one.

But just your general advice on where you think we should be

going, what should our priorities be in pushing for trade agreements, and just thoughts on what seems to be working from your

perspective, and what not. I know, Mr. Schulman, you are concerned about cultural preferences that countries advocate, and also

piracy.

I think you mentioned earlier the intellectual property problems,

and so forth. But just to give all four of you an open, running field

here, just whatever comes to mind. This is your opportunity. Let

her rip if you have got some complaint or something that has been

bothering you.

Mr. MENGEBIER. Senator, maybe I can just start by saying this.

CMS Energy is the largest American investor in Morocco and we

have already seen positive effects of the U.S.-Morocco FTA even before it has gone into force and before Congress has approved it.

As I mentioned in my testimony, we saw the adoption last year

of a very progressive labor code in Morocco, and much of the impeVerDate 11-MAY-2000 13:52 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 95480.000 SFINANC2 PsN: SFINANC2
39

tus for that was the negotiations between the United States and

Morocco on this FTA.

I think the U.S. Government, the USTR, and the Congress is on

the right track in terms of negotiating individual FTAs with countries like Morocco, like Jordan, like Bahrain, like Australia, and

other countries. And if you have an FTA that is a high-standard,

comprehensive agreement like the U.S.-Morocco FTA, I think that

sets a standard for other FTAs in other regions.

I think the U.S.-Morocco FTA is going to be a driver for the goal

of establishing a Middle East free trade area, and in a region that

is as integrated and as connected as the Middle East, it is vital,

I think, to have a regional approach. But I think these individual

FTAs do go a long way towards advancing that goal.

Senator BAUCUS. How would you approach the FTAs differently?

I mean, I have sometimes thought that perhaps we should go to

countries that have greater commercial value, greater bang for the

buck, not to denigrate Bahrain or some of the smaller countries.

But, of course, there are foreign policy considerations here, too, to

some degree.

But any thoughts on, for example, Thailand? Is it another one of

the southeast Asian countries where there is more commercial

value? Do you have a thought on which FTAs to pursue that would

be a higher priority in comparison to others?

Mr. SCHULMAN. Two comments on that. First, the sky really is

the limit. Certainly we would look where the economic potential is

greatest, China, India, eventually. I recognize that there are, as

you point out, foreign relations impediments and other conditions

that make that difficult, if not impossible.

We would hope that, even where we cannot achieve, secondly, a

free trade agreement right now, that dialogues continue and markets remain open as much as possible, even with the absence of an

agreement.

Senator BAUCUS. How about intellectual property? I mean, it just

seems to me that we are not doing very well in intellectual property, that we are not enforcing agreements very well in this country.

Mr. SCHULMAN. Two particulars there. One is access, one is protection. Even when we have access, where there is no protection,

the access is worthless. You can buy, on the streets of the Far East

right now, copies of ‘‘Harry Potter,’’ the movie that has been out

in the movie theater two and a half weeks right now.

It incredibly undercuts the entire market and reduces the participation of all the people who make the movie, and removes their

livelihood, or at least endangers it.

Senator BAUCUS. Why do you suppose our government is not

pressing harder?

Mr. SCHULMAN. I would flip the question to you, sir.

Senator BAUCUS. Well, I will flip it back. [Laughter.]

Mr. SCHULMAN. You sit on that panel, and I will have to answer.

We have done very well on our own. We have competed in a free

market with attractive products that people have bought around

the world.

More and more countries are trying to support their own cultural

industries with quotas, with import duties, the rest. I would hope

40

that the strength of the product, one, will continue to be desired

around the world.

Second, that we will erode the attractiveness of the illegality by

attracting partnerships in those various countries. Right now, we

have started to do some theaters in China, and the only way we

can do it is with government-sponsored entities as our partners,

initially 50 percent owners or more. Now we are reducing that.

More and more of that joint operation, I hope endorsed by the U.S.

Government, will go a long way.

Senator BAUCUS. As you know, it was not long ago, a few months

ago, I was walking down the street. And you all know where it is.

It is in Beijing, right near the American embassy, and you have

people who are tugging at you, grabbing your sleeve to sell you

something that is counterfeit. I raise it frankly with the Chinese

and I raise it with American officials, and I cannot understand why

there is not more done.

Mr. SCHULMAN. If they will not let the product in, it will get in.

If they will not let it in legally, it will get in illegally. If they price

it too high, they will force others to sell it cheaply. All of those

things, we hope you will help us erase.

Senator BAUCUS. I appreciate it.

Mr. HECK. I would like to speak in support of that, too, from an

agriculture view. The lack of intellectual property protection in

other countries in the world is a problem for us in seed and crop

protection of products, and the price on machinery and patents. It

also hurts our agriculture to not have the intellectual property protection that we need.

Senator BAUCUS. All right.

Lochiel, where is our greatest market potential?

Mr. EDWARDS. Well, as a Montanan, I love the Asian rim because

we can reach that market. But a rising tide raises all boats, so to

speak, and shipping wheat out anywhere in the United States

greatly improves our market.

You look at the population in Southeast Asia and the western

side of the Pacific, and the potential is huge. I see those standards

of living raising more quickly than we could ever have imagined 10

years ago. Thus, the tastes are going to change and the products

that they demand will change.

Senator BAUCUS. I was over in China and it is incredible. China

makes no pretense at being self-sufficient. Not too many years ago,

they said, we will produce everything we consume. They make no

pretext whatsoever.

I think they have an deficiency like 50, if I recall, or 40 million

metric tons deficiency, with people moving away from the farms,

and do not want to double crop, and the Gilbe Desert encroaching,

and so forth, that they are going to be buying big time.

Mr. EDWARDS. They are an industrious nation and I do not think

they need to produce all their food, if they are comfortable with

that.

Senator BAUCUS. They cannot. They cannot.

Mr. EDWARDS. Yes.

Senator BAUCUS. They admit they cannot.

Mr. EDWARDS. Right. So, they are going to have to accept that.

We run into that with all these free trade agreements. There is an

41

innate desire for countries to be self-sufficient in their food, and

these free trade agreements initially cause some trepidation on

their part as far as giving up maybe a portion of their farm economy. But we are becoming a global economy. There are people who

are uncomfortable with that along the way, but it is coming whether we like it or not.

Senator BAUCUS. My time has been up for some time. I am sorry.

The CHAIRMAN. Mr. Schulman, you noted in your testimony that

both the Australia and Morocco agreements include strong protections for intellectual property rights that are so important for your

industry. You also noted that the agreements recognized the impact that emerging technologies have on those businesses.

Could you elaborate on how these agreements may serve as a

model for addressing the impact of emerging technologies in the entertainment and media industries?

Mr. SCHULMAN. Sure. For approximately the last 10 years, it has

been said that 5 years from now we will be serviced by video on

demand, or near video on demand. We will not go to the video

stores and take home cassettes or disks, but rather we will be able

to dial up and choose various things to come in either on our television set or on our monitors.

That technology, providing a great new opportunity, also provides a great threat. To the extent that it is not being taxed in the

two FTAs and the free trade, and digital downloads in e-commerce

is one of the key elements here.

It will be the revenue source of tomorrow. I do not know when

the tomorrow is. It has always been 5 years out, as I said earlier,

and I still think it is five years out. But so long as that is allowed

and protected, we will go forward.

The CHAIRMAN. Mr. Mengebier, you mentioned that you are confident that the free trade agreement will result in increased foreign

investment in Morocco. Do you believe that this would be the case

due to the specific investment provisions in the free trade agreement, or for other reasons?

Mr. MENGEBIER. Mr. Chairman, I think the specific investment

provisions in the FTA will promote trade and investment between

the United States and Morocco. We were on the phone yesterday

with the plant manager at our power plant in Jorf Lasfar in Morocco, and we were asking him about where we source the supplies

and products that we used to maintain our power plant there. About $8 million comes from the European Union right now, and about $2 million comes from the United States. What our manager

told us, was that with the FTA going into effect, he hopes the next

couple of years to shift suppliers from the EU to the United States

and get about $5 million in products and services from U.S. firms.

There is a lot of opportunity there for computer, engineering, and

other types of suppliers for our project here in the United States.

Let me just give you one example. Chemitron is a New Jerseybased company that produces a desulfurization technology that allows us to remove fine particulates from our stack when we burn

low-sulfur coal.

So, that is an opportunity that we have already taken advantage

of, and we see a lot of other opportunities in the areas that I mentioned if the FTA goes into effect.

42

The CHAIRMAN. You also spoke about the advantage of this free

trade agreement with Morocco having a positive impact on moving

ahead their new labor code.

Do you believe that other changes, presumably positive changes,

would result in Morocco’s domestic regulations following implementation of an FTA?

Mr. MENGEBIER. Yes, I do, Mr. Chairman. I think that what the

FTA is going to do with regard to Morocco’s new labor code, is it

is going to continue to provide impetus for the implementation of

the code.

I think it is going to reinforce to the government of Morocco that

they are on the right track in terms of labor and other regulatory

issues. So, I think it is very much going to continue to lead to progressive changes in the regulatory environment in Morocco.

The CHAIRMAN. Are you knowledgeable about any other U.S.

service companies that might invest in Morocco because of the free

trade agreement?

Mr. MENGEBIER. Let me just give you a couple of other examples.

We have a company that is based in New Jersey called Fan Services Associates, FSA, that provides axial fans for our generating

unit. They cool the generators. So, we are having conversations

with them about additional supplier opportunities.

I have mentioned Chemitron. I said that was from New Jersey,

but it is from the State of Washington. That is the desulfurization

technology.

Combustion Engineering is an engineering and contracting firm

based in Connecticut. I think that the opportunities for products

and services from that company are going to increase as a result

of the FTA. Then as I mentioned, we are talking to a number of

American-based suppliers on circuit boards which would go into the

computers that we use to operate the plant.

The CHAIRMAN. Yes.

Mr. Heck, you mentioned that you are pleased that the Moroccan

agreement and negotiations did not exclude any products. I need

to know why you feel strongly about that.

Mr. HECK. Well, we know that when some products are excluded

in some agreements, that it leads to other products being excluded

in larger agreements. We know that, in general, U.S. agriculture

is much better off in a world where we have more market access

and reduced tariffs because we are very competitive overall in agriculture. We do not like to see the exceptions, because at some point

they will come back and we will be the ones that are accepted.

The CHAIRMAN. My last question would be in regard to your feeling that you are very optimistic about increasing soybean sales to

Morocco because of this agreement. Would increases sales to Morocco assist in any way in expanding U.S. sales to any other countries in the region or is that unrelated?

Mr. HECK. Well, I listened earlier this morning to the first panel

and USTR said that having a free trade agreement helped them in

negotiations with other countries and with WTO, and I believe that

is accurate. When Moroccan citizens are enjoying the benefits of

the reduced tariffs on soybean products, we are hopeful that it will

lead to agreements with other countries in the area, too.

The CHAIRMAN. All right.

43

Senator Baucus, do you have anything else?

Senator BAUCUS. No, Mr. Chairman. Thank you.

The CHAIRMAN. All right.

We thank all of you. We think we have had a very good, thorough discussion of everything dealing with these two agreements,

and look forward to it. I might suggest that there might be additional questions. I should have said this for the first two panels,

too.

But we are going to keep the record open for additional questions

and we would like to have answers, if you could get them to us

within 7 days, just in case you get any from us or from the people

who could not be here, for sure. Thank you all very much.

[Whereupon, at 12:55 p.m., the hearing was concluded.]

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86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

(149)

COMMUNICATIONS

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

Æ